In August 2010 BHP Billiton,
the largest mining corporation in the world, announced
that it was making a bid to buy control of the Potash
Corporation of Saskatchewan. For the next three months
there was a national debate on the issue. The provincial
Saskatchewan Party Government took a strong stand
against the takeover, as did the opposition New
Democratic Party, the federal Liberal Party and various
business interests. It was expected that Stephen
Harper's Tory government in Ottawa would approve the
takeover. The Harper government had consistently
supported increased foreign investment in Canada and had
opposed any government taking action in such cases.
Many across Canada expressed
dismay at the prospects of another takeover of a major
Canadian corporation. The provincial government went to
Investment Canada asking it to rule that the foreign
takeover was not of "net benefit" to Canada. Investment
Canada was created by Brian Mulroney's federal
Conservative government in 1985 to replace the Foreign
Investment Review Board. Its goal was to promote foreign
investment. Since that time it had reviewed over 1600
takeovers of Canadian corporations by foreign
corporations and rejected only one!
Nevertheless, major political
and business pressure was put on the Harper government.
Under threat from their political allies in
Saskatchewan, they caved in and blocked the takeover.
But during the political discussion none of the
political parties, business leaders or the mass media
asked the most important questions. Who owns and
controls the Potash Corporation of Saskatchewan? Is it
really a Canadian corporation? Why are the royalties and
taxes on the industry in Saskatchewan so very low? Why
are its profits so high? Has the province in any way
benefitted from the privatization of the Potash
Corporation of Saskatchewan, a vibrant Crown corporation
at one time? How would it be possible for the people of
Saskatchewan to once again own and control this most
important resource corporation? These are the
issues that I have addressed in this paper. It is now
available on the CCPA-SK web site:

Selling
the
Family
Silver:
Oil and Gas Royalties, Corporate Profits, and the
Disregarded Public

by John W. Warnock

Edmonton:
The Parkland Institute, University of Alberta;
Regina: Canadian Centre for Policy
Alternatives-Saskatchewan,
November 16, 2006.

This study was published right before the
Parkland Institute's 10th Annual Fall Conference,
November 17 - 19, 2006, at the University of Alberta
in Edmonton. For an overview of the conference, "Power
for the People: Determining Our Energy Future," see
the link below. The full report, and the executive
summary, are available at both of the web
sites:

This in an appendix in the paper on the Potash industry in
Saskatchewan.

Natural
Resources: The Struggle between Democracy and
Liberalism.

by John W. Warnock
December 15, 2010

For thousands of years human beings lived in
small communities, commonly referred to by
anthropologists as “band societies.” These were all
egalitarian, democratic societies, based on the
principles of reciprocity. Given this long history, one
could argue that this is the normal social structure for
human beings. The basic moral principles of these
societies was altruism and solidarity. Land and natural
resources were common to all.
In these democratic societies
there were differences in personal property, but there
was no concept of private property in the means of
production, which is the standard today. Everyone had
access to natural resources and was guaranteed adequate
food, clothing and shelter. Customs, rules and moral
codes were established on the basic democratic principle
of utilitarianism. Political decisions were made by
popular participation. Anthropologists have noted that
in these societies, sharing among the group increases
when there is a shortage of food or a threat of
starvation.In all these
societies, land and natural resources belong to the
people as a whole. The different communities often had
territories where they operated, recognized by others,
but even here there was no strict territorial notion of
ownership. These band and tribal societies have been
held up as the earliest examples of democracies. The
fundamental value was the recognition of the equal worth
of all human beings. (See Fried, 1967; Hindess and
Hirst, 1973; Lewellen, 1992)

Unequal access to land and
resourcesChange started to come with
the neolithic revolution, the development of modern
agriculture. Through the use of improved staple crops,
the introduction of draft animals, and the use of
irrigation, those who farmed the land were able to
produce an economic surplus. The storage and
distribution of cereal grains, in particular, allowed
the development of a social division of labour. For the first time we
see the creation of social classes, the fundamental
division between the political, religious and economic
elite, who had some form of special use rights over land
and resources, and the majority who were the producers:
serfs, slaves, peasants, peons, independent farmers who
paid a tax, those under debt bondage, etc.. It was
common that the producing class was forced to surrender
50% of the crop that their labour had produced. This was
called “rent,” surrendered supposedly for the right to
have use of the land. However, in reality this was a
system of appropriation of the “surplus labour” from the
agricultural producers, the surplus over and above what
was necessary for the survival of the producing family.In these new
hierarchical societies, where the farming classes were
grossly exploited and often faced starvation, the
political state became necessary in order to enforce the
social division of labour. With clear class divisions,
laws and rules were established and implemented by the
dominant classes. The military, the penal system, and
the death penalty became central characteristics of
these states where gross social inequality was the norm.
Rebellions by the producing classes had to be contained.
But while access to land and resources was unequal, the
concept of individual ownership was virtually
non existent. As territorial states were developed, land
and natural resources became state property, to be
allocated by the ruling political elite. (See Harris,
1977; Balandier, 1970; Krader, 1968)After the fall
of the Roman Empire, the decentralized political system
led to the development of the feudal system of ownership
and use of land and other resources. Local lords and
tenant farmers had rights to land; the serfs paid a rent
to their landlords, in the form of products, labour time
and then later money. But there was no private ownership
of land, and serfs had rights to the use of land.The shift to
private ownership of land and resources came during the
early rise of capitalism, the period commonly referred
to as mercantilism, roughly between 1500 and 1750.
Mercantilism was characterized by the rise of the
territorial state, the development of the modern state
political system, and the expansion of European
imperialism and colonialism around the world. The
territorial state became the new owner of all resources,
and the absolutist kings and queens granted land and
other natural resources to privileged individuals.

Land rights and imperialism For Canadians, what is
most important is the changes that were occurring in
England. The Norman invasion of 1066 began the process
of establishing a more centralized political order.
William the Conqueror laid claim to all of England by the
right of conquest. As the absolute sovereign, he
then allocated all the land of the country to a special
group of aristocrats. These lords in turn granted land
use to other subsidiary lords, then down to the tenants
who actually did the farming. Peasants had the right to
land use, for which product and services were rendered
as rent. But there was still no concept of private
ownership of land; lords could not buy and sell land and
resources as if they were private property. The Crown
still held absolute property rights.However, the
landlords strove always to increase their control over
the land. Parliament originated as an instrument by
which the landlords used their political power to gain
the right to private ownership of land and resources
from the absolute monarch. By the 17th
century men with property had used their complete
control of parliament to establish a new legal system
which granted them private property rights. Whereas the
feudal system had been based on relationships between
persons, by the 17th century this had been
replaced by the capitalist concept of the exchange of
things. (Hindess and Hirst, 1975; MacPherson, 1962;
Vogt, 1999)The other major
development in Europe over the mercantile period was
modern imperialism and colonialism. England and the
other major European nation-states embarked on extensive
military assaults around the world. This involved not
only the subjugation of the majority of the people of
the world but also the imposition of absolutist colonial
regimes. In all the conquered areas of the world, which
included almost all of the non-white and non-Christian
peoples, the colonial powers ended all systems of common
ownership of land and resources. As one political
economist noted, these acts of piracy “signalised the
rosy dawn of the era of capitalist production.” Not only
did the imperial states seize all land and resources,
individuals and their families arrived from Europe bent
on grabbing “free land” from the indigenous populations.
(See Weaver, 2003)Those of us who
live in western Canada know this from our own history.
On May 2, 1670 the British Crown created the Hudson Bay
Company and gave the company “the sole trade and
commerce of all these seas, straits, bays, rivers,
lakes, creeks and sounds ... that lie within the
entrance of the straits, commonly called Hudson Straits
and the possession of all such lands and territories not
already possessed by other subjects or the subject of
any other Christian prince or state.” The mercantile
corporation was declared to be the “true and absolute
lords and proprietors of the entire territory.” It
mattered not who lived on this land.

Liberalism and the right to
steal land and resources The European monarchs
had no problem justifying their conquest and domination
of other peoples around the world. These people were
described as barbarians, were not Christians, and were
by definition inferior. The Europeans were bringing
Christianity and civilization. It took a while for the
Church in Rome to determine that the non-white people
around the world were actually human beings. The Church
then decided to end the practice of indiscriminately
killing these people and instead chose to turn them into
slaves and serfs to work in agriculture, forestry and
mining.But some
English capitalists felt the need for a moral
justification for seizing other people’s land and
resources and ending their freedom. The most influential
defence of the new capitalist imperialism was set forth
by John Locke (1637-1704), generally considered to be
the founder of liberalism and liberal political economy.
He set down the ideological justification for individual
rights, the right to own private property and the
justification for imperialism and colonialism in The
Second Treatise of Government (1690) and Some
Considerations of the Consequences of the Lowering of
Interest and Raising the Value of Money (1691).Locke argued
that England had the right to seize land abroad as their
settlers and business enterprises would be productively
using the land and resources. The land not under
cultivation by the indigenous population was considered
“waste land” and could be seized at will. But Locke went
farther in advancing the liberal view of private
property. Since the indigenous populations of North
America cultivated their lands in a collective or
democratic manner, Locke argued that they had no claim
to it. Under the principles of liberalism, those who
farmed could only establish a legal claim if the land or
resources were used on an individual basis; it had to be
enclosed and fenced off by individuals. Since this was
not the case in North America, new local governments,
enterprises and settlers were free to take any land that
was being used by the indigenous populations. Equally important
to establishing the liberal capitalist view of private
property, Locke argued that those individuals and
enterprises which seized land and natural resources did
not require the consent of others or the community in
general. North America was “wilderness” or “vacant
space” and any use of the land by colonizers would be a
beneficial improvement. He also stressed that it was not
necessary for those who seized this land and resources
to pay any compensation to the general public.
Furthermore, the indigenous populations could only claim
the right to use the land and resources if they were
selling their product on the world market.Finally, Locke
argued, government was needed to establish rules to
defend the rights of the owners of private property.
This is the first task of governments. It is only
logical that those who participate in politics, those
who can be classed as “citizens,” who can vote and hold
a seat in parliament, is limited to men who own
property. (Arneil, 1996; Macpherson, 1992)

The democratic reaction The traditional liberal
view of ownership and control of natural resources by a
small group of men did not gone unchallenged. Over time
we have seen the struggle to revive the democratic
tradition. In the political area, men without property
mobilized in a broad fashion to achieve equal rights
with those who had property and the right to form trade
unions. Those who were slaves struggled to achieve
freedom. Non-whites fought to obtain the same rights as
whites. Colonized peoples took up arms to achieve
independence from the European empires and establish
their own governments. Women continue to struggle to be
recognized as persons with equal rights with men.As democracy
spread across the world the majority who did not own
private property in the means of production took
political action, formed political parties, eventually
formed governments, and pushed for economic and social
rights and greater equality. Part of this broad
democratic struggle has included the demand that natural
resources belong to the people as a whole. Elected
governments, with sovereign power, can redefine
ownership and how resources are developed and used. It
is clear that in the period since the rise of capitalism
and liberalism, the central political struggle around
the world has been between the supporters of the liberal
order of privileges for the few and those who support
the democratic value of equal rights for all.

Re-examine the Status
QuoAre We Getting a Fair Return for
the Exploitation of Our Natural Resources?

By John W. WarnockThe
Leader Post
October 3, 2011

There
has been some discussion recently about the
rate of return the people of Saskatchewan
receive for the extraction and sale of our
non-renewable natural resources.
Unfortunately, our governments have not
informed the general public on this issue.
How does the province compare to other
political jurisdictions which are dependent
on resource extraction?
Commonly, the term
“royalties” is used to describe the return
to the owners of the resources, but all
political jurisdictions use a variety of
policy tools. We can get a general picture
of our situation by looking at the total
effective rate of return in a few mining
jurisdictions, using a model prepared by the
World Bank:

How does Saskatchewan
compare? The Ministry of Energy and
Resources reports that over the past ten
years the total of royalties and taxes on
the potash industry have averaged 10.8% of
revenues. For the uranium industry, the
return to the public has been 9.8% of
revenues.
The most valuable mineral
in today’s economy is petroleum. Around the
world, since achieving independence from
their colonial masters, the major producing
countries raised their royalty rates and
then created state-owned National Oil
Companies to enable the capture of all the
profits from extraction and use. Today 90%
of the conventional oil reserves are found
in countries where National Oil Companies
have complete control of the industry. In
many of these countries privately-owned
Independent Oil Companies operate on a joint
venture basis.
We can get an idea of the
general state of the industry by looking at
the share of oil revenues collected by
governments in several jurisdictions,
reported by the U.S. Government
Accountability Office and cited by Andrew
Nikiforuk in his recent book, Tar Sands.

How does Saskatchewan
compare? The Ministry of Energy and
Resources reports that over the past ten
years all returns to the province from the
extraction of crude oil have averaged 15.2%
of industry revenues. The present royalty
structure was set by the NDP governments of
Roy Romanow and Lorne Calvert.
This apparently low level
of return to the people of the province was
not always the case. During the NDP
government headed by Allan Blakeney
(1971-82) oil royalties and taxes were
raised to over 50% of industry
revenues. The expansion of Crown
corporations in the area of resource
extraction by the Blakeney government proved
that the people of Saskatchewan are just as
capable as the people of Kazakstan.
A notable success was the
development of the natural gas industry.
Under the CCF government of T.C. Douglas,
ownership and control of the industry was
given to the Saskatchewan Power Corporation.
Like all other state enterprises in the
field, they searched the geophysical data,
bid and acquired land claims to develop
resources, paid their fees and royalties to
the province, and hired service companies to
develop the resource. They acquired large
reserves in Alberta. This was deemed a
prudent policy given the fact of our climate
and the necessity of providing energy to
home owners and industries in the province.
This highly successful business, owned and
operated by the people of the province, was
privatized by the Romanow and Calvert
governments.
Our governments,
political parties and the transnational
corporations that dominate our resource
sector may be satisfied with the status quo.
But at the very least, the general public
has a right to a complete and open
examination of this vital sector of our
economy.

John W.
Warnock is retired from teaching political
economy and sociology at the University of
Regina.

Saskatchewan as a Resource Hinterland Economy
by John W. WarnockOctober 2, 2010Conference on
Resources, Empire and Labour: Globalization and
AlternativesLaurentian UniversitySudbury Ontario

Abstract:
Saskatchewan is a hinterland region. Once the indigenous
population had been removed, European settlers created a
province based on dry land farming and ranching. The
period after World War II saw the development of mineral
resources: coal, oil and gas, uranium and potash. While
these new industries were important to the nominal gross
domestic product, they have provided very limited
employment. Development has been dominated by large
transnational corporations.

Saskatchewan was also the home of the populist movement
which created the social democratic Co-operative
Commonwealth Federation/New Democratic Party. As the
dominant governing party after 1944, they set the policy
on resource extraction. The CCF/NDP originally stressed
the objective of public ownership and control of
resource development, including ioncreased resource
royalties. However, NDP governments between 1991-2007
shifted to a neoliberal strategy on resource
development. This paper presents an overview of this
history and attempts to explain the shift in policy
oreintation by the local social democratic government
and party caucus.

To acces the full text of this paper it will be
necessary to use Adobe Acrobat or Foxit Reader:

A shorter version of this paper will be published as
part of a book next year, edited by David Ledbetter,
Department of Economics, Laurentian University. How do
we collect economic rents from non-renewable
resources?

Note: This is an extract from John W.
Warnock,
Saskatchewan: The Roots of Discontent and
Protest. (Montreal: Black Rose Books,
2004. Chapter 11: "The Struggle over
Resource Royalties."

Economic rent
The concept of economic rent used in
the petroleum and mining industries today is that set
forth by David Ricardo in 1817. If all mines have the
same degree of ore concentration, and the same costs of
production and transportation, then the value of the
extracted resource would depend only on the quantity of
labour needed to bring the resource to market. Following
from his argument on rent in agricultural land,
Ricardo’s thesis is that the resource extracted from the
poorest mine, sold in the market, and returning the
normal rate of profit will yield no rent. Rent only
comes from those mines which have the higher grade of
ore or mineral fuel. Rent is a surplus income over and
above normal profit.
An example of this would be uranium.
Saskatchewan has 31 percent of world uranium production,
by far the highest grade ore deposits, and modern
efficient mining operations. Under free market
conditions, it should bring in a high level of economic
rent. Markets have been somewhat limited because of
uranium’s key role in nuclear weapons; other governments
maintain extensive subsidies to less efficient
operations for the purpose of national security
controls. The domestic nuclear industry is also limited.
Nuclear power plants are very expensive to build, and
because of the hazardous nature of the entire nuclear
fuel cycle, there is strong opposition around the world
to further development. Nevertheless, the profit margin
of the Saskatchewan mines should be high. This may be
the case, but we do not really know. A high level of
Ricardian rent extraction in Saskatchewan is definitely
not reflected in the provincial royalties and taxes the
corporations pay. (Anderson, 1987; Whillans, 1997;
Pembina Institute, 2001; Prudhomme, 1998)

Capturing economic rent
It is very difficult to determine the
economic rent for the extraction of mineral resources in
Canada’s political economy. Natural resources are in
theory owned by the public as a whole and managed by our
elected provincial governments. It is presumed that the
public as the owners of the resources should get a
return when they are privatized. The mining and fossil
fuel industries are dominated by large trans-national
corporations which are granted licenses to extract and
use natural resources. There are many different resource
royalty systems which vary between provinces, and they
vary between projects in the same industry. However,
there are a few basic approaches to rent extraction that
are in use today. (See Gunton and Richards, 1987)
First, a government can try to
capture some of the economic rent through a flat rate which is
usually a quantity-based royalty. This was the system
used originally in the coal mining industry. A flat rate
per tonne was charged. This approach does not take into
consideration ore grades or the costs of production. The
reasoning behind this approach is the belief that when a
private company takes a natural resource from the public
for its own use and profit they owe the people some
basic return. The purchase of the raw material should be
considered a cost of production. However, under the flat
rate system inflation reduces the value of the royalty.
This system is not widely used today, although it is
still common for construction materials. Other similar
royalties include a property tax, usually a percentage
of the value of the land for mineral or oil extraction,
or a lease fee, an annual fee on land leased for mineral
purposes. These are used in Saskatchewan.
Second, an ad valorem royalty is widely used,
usually a percentage of the sales price or gross
revenues that the operator receives. This approach
should be easy to calculate. However, it is very
difficult to determine when “sales” are in fact
intra-company transfers by trans-national corporations.
These “sales” are not market transactions but
administered prices. This situation is the norm in
Saskatchewan.
Third, a net profits royalty is used. This
also takes the form of an ad valorem rate, usually a
percentage of the profits, which can increase as the
rate of profit increases. This is the approach favoured
by the private corporations and has been widely adopted
in Saskatchewan in more recent years. This tends to
result in low royalty payments, sometimes approaching
zero. Michael Cartwright, a U.S. specialist in this
field, has commented that “there are virtually no buyers
for this type of royalty [in the United States] because
of the creative accounting that the mining operator can
use to depress the royalty payment account.” When the
Blakeney government enacted a net income royalty on
potash, the private corporations refused to provide data
on their operations. This provoked the NDP government
into nationalizing part of the industry. (Cartwright,
1999; Gunton and Richards, 1987)
Fourth, a government can introduce a marketing board with
monopoly power to purchase all the output from the
corporations and market the product. This approach gives
the government additional power when dealing with large
trans-national corporations. It can increase the ability
of the government to assess the real costs of resource
extraction. Ross Thatcher’s Liberal government set up
the Potash Conservation Board in 1969, a marketing board
with monopoly power to sell potash. The government was
trying to capture a royalty in a situation of over
investment and excess capacity, but it was also trying
to create a cartel which could set prices and production
quotas. In 1973 Peter Lougheed’s Conservative government
in Alberta created the Petroleum Marketing Commission, a
Crown corporation which had broad control over the
production and marketing of oil. It held ownership of
all oil in the province until it was sold to the
consumer. It was quite successful in capturing economic
rent. (Warnock, 1974; Richards and Pratt, 1979)
Finally, there is the use of the
state through joint
ventures with private corporations and the use
of state-owned
corporations. Through a number of joint
ventures between the Saskatchewan Mining and Development
Corporation (SMDC) and private corporations, the
government of Saskatchewan was directly involved in the
extraction of uranium and was able to determine the real
costs of uranium production. Through the Potash
Corporation of Saskatchewan (PCS) and the Saskatchewan
Oil and Gas Corporation (Sask Oil) they appropriated all
the rent from some resource extraction and paid it into
the provincial treasury.

PEMEX as a case study
A very good exampe of the benefits of
state ownership can be seen in Mexico. Petroleos
Mexicanos (PEMEX), a state owned enterprise, has had
monopoly control over the extraction, refining,
processing and distribution of oil since 1938. The
government of Lazaro Cardenas, facing a capital strike
by the foreign-owned oil companies, responded by
nationalizing all of them. PEMEX has been criticized by
mainstream economists as inefficient, hiring too many
workers, hiring too many high paid executives, and being
under the control of patronage. These criticism are
certainly true. But it is the largest employer in
Mexico, pays the highest wages and salaries, and over
the years has provided around 40 percent of all federal
government revenues. Students going to state owned
universities in Mexico pay no tuition. This is provided
by grants from the federal government, economic rent
from the extraction and sale of oil. The vast majority
of the people in Mexico are determined to keep state
ownership of this industry. State ownership of the oil
industry is entrenched in the constitution. The economic
rents stay in Mexico, and they do benefit ordinary
people. However, this approach to capturing economic
rent is out of fashion in the new era of globalization,
free trade and the private enterprise economy. State
ownership certainly benefits the population as a whole,
but not private investors. (See Teichman, 1988)

The case for public
ownership
The case for public ownership of
natural resource extraction industries was advanced by
Eric Kierans in his report on the mining industry to the
government of Manitoba in 1973. He argued that it is
extremely difficult to devise a system of capturing
economic rents when the mining industry is dominated by
large trans-national corporations. Even when there is
some revenue in the form of royalties, it is usually not
enough to “finance the costs of the highways, schools,
hospitals and other services that are required to make a
new community livable.” With the wide range of
subsidies found in mineral extraction, “the social costs
will exceed the returns and the resource development,
far from yielding a net income to the province, becomes
a burden on the whole community.”
Kierans argued that “it is vital to
the growth and development of a province or nation that
it retain these super-returns [the Ricardian economic
rent] as a means of ensuring its growth and lessening
its dependence on others.” The former president of the
Montreal Stock Exchange went farther:
"To be satisfied with the new jobs
created and to forego the surpluses and profits inherent
in the development of its own endowment is hardly the
mark of a strong and mature government. It accepts the
role of “hewers of wood and drawers of water” for its
people when they are capable of much more. That role
provides wages and salaries and little else. The
profits, which direct and finance the future, belong to
those who have been invited in, and this capital
formation . . .does nothing for [government] priorities
in the fields of agriculture, health, education or
whatever. A developing nation, a province or a colony
may be rich in its beginnings but when that wealth is
depleted through the poverty of its policies, nothing
remains of the original endowment but the instability,
dissatisfaction and political unrest arising from poorly
conceived policies. "(Kierans, 1973)

The Johnson-Shoyama
Graduate School of Public Policy at the
University of Regina hosted a mini-symposium
on Saskatchewan energy policy last Friday.
However, the afternoon meeting only
considered oil and gas policy.
Appropriately, the first
speaker was Pierre Alvarez, former president
of the Canadian Association of Petroleum
Producers (CAPP), the industry lobby group.
Alvarez cited the newly-released report by
the International Energy Agency (IEA) which
emphasized that if current production and
consumption trends are to continue, we will
need a massive new injection of capital in
the industry. The IEA estimates this at $26
trillion between now and 2030.

Continental
energy integration
Canada is to continue as
the most important source of U.S. imports of
oil and gas. This explains the new pipelines
being constructed to ship bitumen from the
Athabaska tar sands (and perhaps
Saskatchewan) to Chicago and Louisiana for
refining, Alvarez argued.
North American energy
security has been improved due to the
development of new technologies which make
possible the economical extraction of
natural gas and oil from coal and shale
deposits. Horizontal wells and fracturing
have revived the natural gas industries in
Alberta, British Columbia, Wyoming, Montana,
Colorado and Texas. The new drilling
techniques have also enabled the
exploitation of the Bakken play in
Saskatchewan and the Northern United States,
reviving the light oil industry.
A member of the audience
argued that Canada has no sovereignty in
this area because of the North American Free
Trade Agreement (NAFTA) which requires
Canada to ship oil and gas south even when
it is against the public interest. This
policy has blocked the development of a
national energy policy which would allow
western Canadian oil to replace the supply
of oil eastern Canada now imports. Alvarez
was vehement in his rejection of any
national energy policy. He further argued
that “shipping Canada’s oil and bitumen to
Chicago and Louisiana is simply a matter of
economics. The distance is shorter than
shipping to eastern Canada.” No one
questioned whether this was actually true.

The need
for low royalties and taxes
Alvarez stressed that the
key to this essential development is
government financial incentives and
regulatory frameworks which assist the
industry to grow. To no one's surprise, he
strongly attacked the decision of the
Conservative government in Alberta to raise
the royalties on the oil and gas industry.
Praise was heaped on recent governments in
Saskatchewan who lowered royalties and taxes
on the industry.
In response to a question
on what is a fair return to investors in the
oil and gas industry, Alvarez stated that
the historic rate of 12% “will not come
close” if the industry is to attract
sufficient investment. He denounced the
Alberta government’s new royalty system
which increases the rate of the return to
the province as the price of oil increases.
The new tax policy “removes the risk premium
which is at the top.” Investors in the
oil industry in Canada have come to expect a
far greater return on their investment than
they could find elsewhere.

The
approach of the new Obama presidency
Bruce Bulloch, Director
of the Maguire Energy Institute, Southern
Methodist University in Texas, outlined what
we could expect from Barrack Obama in the
field of energy policy. He started by saying
that “No one really knows what Obama is
going to do.” His policies are not well
developed. Furthermore, as the new president
he will be greatly constrained by the
financial and economic crisis and the huge
deficit in the budget that he will inherit
from the Bush administration.
In the presidential
campaign Obama proposed a cap-and-trade
system to deal with greenhouse gas
emissions, spending $150 billion on “green
energy,” emphasis on energy efficiency, and
a windfall profits tax on the oil companies.
The last policy is “simply off the agenda,”
Bulloch argued. Furthermore, it is clear
that Americans will never accept any form of
a carbon tax. He noted that Obama has
expressed skepticism of nuclear power. In
contrast, Bulloch argued that nuclear power
would be necessary if the U.S. were to
reduce greenhouse gas emissions.
Bulloch suggested that we
should look at the research done by Matt
Simmons, the Texas banker who specializes in
oil and gas. Energy supply, as the IEA
finally admitted this year, is in decline.
Peak oil is here

Environmental
problems with natural gas extraction
Natural gas drilling is
expanding everywhere, using the new
technologies. He stated that wells are being
drilled within 300 feet of people’s homes.
In response to a question
from the audience, Bullock admitted that
there is an environmental downside to the
new drilling technology being used to
extract natural gas. Everywhere, the high
pressure extraction process, which induces
fracturing of coal and shale deposits, is
leading to natural gas contamination of
water aquifers and wells. The chemicals used
in the process are often very toxic,
including benzene, which is a strong
cancer-causing agent. This contamination is
leading to widespread grass roots
opposition. Bullock said a recent court
decision for damages in Texas has caused a
major ripple in the industry.

Canadian
energy policy
Keith Brownsey, from the
Department of Policy Studies, Mount Royal
College, Calgary, presented an overview of
energy policy in both Canada and the United
States. Basically, Canada has had no policy
since the reversal in 1985 of Pierre
Trudeau’s National Energy Policy. All
subsequent governments have emphasized
devolution of policy to the provinces,
private corporate development of the
industry, and the international market.
There has been no effort to develop a
national strategy or address the issue of
sustainability.
The policy priority of
Stephen Harper’s government, he stressed, is
to protect the oil and gas industry and to
guarantee the continuation of continental
integration.
In contrast, the Bush
administration established a national energy
policy in the Cheney Report of May 2001, the
U.S. Energy Act of 2005, and the Energy
Security Act of 2007. Goals have been set to
develop alternative energies, support new
technology, but always relying on the large
private corporations and the market.
Brownsey concluded by
arguing that in his opinion the two
countries have a common approach: “lack of
action, obstruction, avoidance and
retrenchment.” Nothing was said at the
symposium on the overall U.S. policy set
forth in the Carter Doctrine of 1980: using
the U.S. military to defend U.S. corporate
access to oil around the world.

The problem
of climate change is ignored
It was expected that Adam
Wellstead, of Natural Resources Canada,
would focus on the issue of climate change
and greenhouse gas emissions. He was one of
the authors of the the NRC study, Climate
Change: Impacts and Adaptation
(2008). It has a section summarizing the
scientific research on the impact on
Saskatchewan. However, Wellstead’s
presentation concentrated on the lack of
co-ordination of policy makers on the issue.
He did note that for Saskatchewan and the
prairies the central issue is “where is the
water.”
In contrast to the
symposium, the new World Energy Outlook by
the IEA also stresses the serious question
of greenhouse gas emissions from the burning
of fossil fuels. Under the present
business-as-usual approach of the past ten
years, fossil fuel consumption continues to
increase as do greenhouse gas emissions and
the average temperature. The IEA argues that
if the world continues to refuse to
seriously deal with this issue, the end
result will most likely be a six degree
increase in the average global temperature
by the end of the century.
The present course of
action is in reality a suicide policy for
the world as we know it. The scientists with
the U.N. Intergovernmental Panel on Climate
Change have argued that we need a 70% reduction
of fossil fuel consumption to stabilize
greenhouse gas emissions and prevent the
increase in average temperature by two
degrees. There was nobody at this symposium
who wanted to deal with this issue.

John W.
Warnock is a Regina political economist.

Profits
from the Alberta tar sands
“Taking into consideration operating costs,
the discount given to low-quality oil sands
crude, the falling Canadian dollar and other
factors, Suncor would be able to earn $28 on
each barrel of oil at a West Texas
Intermediate price of $60 (U.S.).”
Rick George, CEO, Suncor Energy, October 29,
2008

In
mid-April the international price for WTI crude oil
reached $110 per barrel. In Saskatchewan the price of a
litre of gasoline rose to $1.23. The large oil
corporations are reporting record profits. Land sales
for exploration and development rights for oil are at an
all time high in Saskatchewan. Why is this
happening? Who is benefitting? At a
recent conference in Washington sponsored by the U.S.
Department of Energy, experts argued that the world
production of conventional crude oil peaked in May 2005
at 74 million barrels a day. The gap to 88 million
barrels a day is now being filled by much more expensive
non-conventional sources. There no longer are any large
new pools of conventional oil be discovered. Despite
warnings by scientists about the looming disaster from
global warming, fossil fuel demand is steadily
rising.

Where can we find more
oil? Of
the remaining oil reserves 77% are controlled by
producing countries with state-owned National Oil
Companies (NOCs) where the privately-owned International
Oil Companies (IOCs) are excluded. These NOCs often
employ western oil and service companies to extract much
of their oil and gas. The Washington conference pointed
out that the countries which have NOCs prefer to deal
with other countries which have NOCs and a
state-controlled industry.
Another 11% of reserves are in countries with NOCs where
the private IOCs have some access through production
sharing agreements. Venezuela is one of these. The norm
in Venezuela is that the state-owned oil corporation
(PDVSA) owns 60% of all developments and the private
IOCs own the other 40%. Only Exxon-Mobil has declined to
participate in these joint ventures.
Russia has six percent of the remaining reserves and is
re-establishing state-ownership and control over the oil
and gas industry. The government has also imposed export
taxes when the price exceeds $25 per barrel in an effort
to capture most of the excess profits.
Only
seven percent of the remaining world reserves of crude
oil are in countries like Canada where the IOCs have
full access to the resource. Thus the large private oil
corporations are having a difficult time finding new
reserves. Talisman, for example, has seen the price of
its stock drop due to the fact that its reserves are
primarily found in mature areas with declining supply
and production.

Oil and gas reserves in
western Canada As
the industry moves to non-conventional sources of oil
and gas, costs rise. But they have not risen nearly as
fast as the international price. In the 1990s it cost
around $6 to extract a barrel of oil in western Canada.
This has now risen to around $15. The average in the
Alberta tar sands is now between $20 and $25. The
Western Canada Sedimentary Basin (WCSB) is a mature area
for oil and gas. Conventional oil and gas production
peaked around 1972 and has been declining. The average
productivity of a conventional oil well in the WCSB has
dropped from 33 barrels per day in 1994 to 18 in 2003.
In 2007 the average production in Alberta was only 12
barrels per day. This is the major reason that the oil
corporations are looking elsewhere for new reserves.
Conventional natural gas production is also declining in
the WCSB. The number of natural gas wells being drilled
in Alberta, the main source of supply, has declined not
only because of the fluctuation in the price but because
the new fields discovered are much smaller and quickly
depleted. Natural Resources Canada (2006) projects that
natural gas production in Saskatchewan will peak in 2005
at 261 billion cubic feet per year and drop to only 70
billion cubic feet per year by 2020.

Exploiting the Bakken
Formation
Geologists and oil companies have known for years about
the Bakken Formation, which is primarily in North Dakota
and Montana but pushes up into Saskatchewan and
Manitoba. The oil is light crude, the most valuable, but
it is trapped in non–porous shale rock. It was
considered uneconomic to extract. But with the very high
price of oil, and new technology, extraction is now
possible. The new technology involves drilling a
horizontal well, fracturing the shale formation, and
then pumping sand into the well. Oil and gas is thus
released. The oil industry believes this new technology
will result in extensive extraction from Saskatchewan.

Non-conventional natural
gas At
present the larger natural gas corporations are shifting
to British Columbia where the Dawson Creek and Tumbler
Ridge pools of non-convention natural gas are much
larger. A similar technology is used to fracture the
non-porous rock and extract the natural gas. There are
high hopes for using this new technology in the Montney
play. The higher average rate of royalties (27% compared
to 14% in Saskatchewan) are more than offset by the
higher rates of production.

Higher royalties are a
world phenomenon All
around the world oil and gas producing countries are
raising royalties and taxes in an effort to capture more
of the economic rent (monopoly profits) that is accruing
to the industry. This is not happening in western
Canada. In
Newfoundland, Premier Danny Williams’ government has
raised the royalty rates, a highly popular move. In the
offshore Hibernia field the oil companies presently get
60% of the revenues, the federal government 32% and the
provincial government 8%. In the White Rose field, the
oil corporations get 56%, the federal government 33%,
and the province 11%. Under the new royalty system for
White Rose the oil corporations will get 37.5%, the
federal government 37.5% and the province 25%. Has this
discouraged investment? Husky and Petro Canada are
rushing to invest there, hiring a new offshore rig which
will cost them $1 million per day.

Oil Policy in
Saskatchewan Oil
policy in Saskatchewan stands in direct contrast to the
rest of the world. Since 1982 governments in
Saskatchewan have emphasized maximizing the return to
the private corporations and minimizing the return to
the people of the province. Between 1991 and 2007 the
province collected on average only 17% of the revenues
from the sale of our oil, the lowest royalty rate in the
world. This is a dramatic change in policy since the
1970s and early 1980s when our government collected over
50% of the revenues accruing to the industry. The
other basic policy is to export our oil and natural gas
to the United States as fast as possible. We are not to
be concerned about how we will heat our homes in 2020.
Eastern Canada imports almost all of their oil from
abroad. There is no concern in western Canada about this
situation or willingness to create a new national energy
policy based on conservation and assuring first access
for Canadians. The
Saskatchewan NDP government fully embraced the U.S.
energy strategy policy set forth by Vice President Dick
Cheney in March 2001. Canadian oil is U.S. oil. On
several occasions cabinet ministers, and even Premier
Lorne Calvert, went to Washington to assure the Bush
Administration that we will ship all of our oil and gas
south of the border. Brad Wall and the Saskatchewan
party agreed. And we will keep our royalties and taxes
to the absolute minimum.

John W. Warnock is
author of Selling the
Family Silver, a study of the oil and gas
industry in Saskatchewan.
Saskatchewan and Oil DepletionBy John W.
WarnockLeader
PostApril 24, 2008
In early April the
international price for WTI crude rose to $110
per barrel. The price of gasoline was $1.23
for a litre. Oil corporations are reporting
record profits. Land sales for exploration and
development rights for oil are at an all time
high in Saskatchewan. What’s happening?
At a recent conference in
Washington sponsored by the U.S. Department of
Energy, experts argued that the world
production of conventional crude oil peaked in
May 2005 at 74 million barrels a day. The gap
to the current production level of 88 million
barrels a day is now being filled by much more
expensive and difficult to access
non-conventional sources.
Of the remaining oil
reserves, 77% are controlled by producing
countries with state-owned National Oil
Companies (NOCs) where the privately owned
International Oil Companies (IOCs) are
excluded. Another 11% of reserves are in
countries with NOCs where the private
companies have some access through production
sharing agreements. Russia has six percent of
the remaining reserves and is re-establishing
state-ownership and control. Only seven
percent of the remaining world reserves of
crude oil are in countries like Canada where
the IOCs have full access to the resource.
Thus the large private oil
corporations are having a difficult time
finding new reserves. Talisman, for example,
has seen the price of its stock drop due to
the fact that its reserves are primarily found
in mature areas with declining supply and
production.
As the industry moves to
non-conventional sources of oil and gas, costs
rise. In the 1990s it cost oil corporations
around $6 to extract a barrel of oil in
western Canada. This has now risen to around
$15. The average in the Alberta tar sands is
now between $20 and $25.
The Western Canada
Sedimentary Basin is a mature area for the
production of oil and gas. Conventional oil
and gas production peaked around 1972 and has
been declining. The average productivity of an
oil well in the WCSB has dropped from 33
barrels per day in 1994 to 18 in 2003. In 2007
the average oil well in Alberta produced only
12 barrels per day. New gas wells are much
smaller and quickly depleted. This is the
major reason that the oil corporations are
looking elsewhere for new reserves.
All around the world oil
producing countries are raising royalties and
taxes in an effort to capture more of the
economic rent (monopoly profit) that is
accruing to the industry. Even in libertarian
Republican Alaska the government is raising
the basic royalty on oil from 22.5% to 25% and
eliminating many of the key deductions and
subsidies.
In Newfoundland in the
offshore Hibernia field the federal government
gets 32% of revenues and the provincial
government 8%. In the White Rose field the
federal government gets 33% and the province
11%. Under Danny Williams’ new royalty system
for White Rose the federal government will get
37.5% and the province 25%. Husky Oil and
Petro Canada are rushing to invest there,
hiring a new offshore rig which will
cost them $1 million per day.
Petro-Canada complained
when the government of Alberta decided to
raise its royalties back to the 20% -25% range
required under provincial legislation. They
are moving their capital to Libya. They will
pay a $1 billion “signature bonus” to the
Libyan National Oil Company. All new
developments will be 50-50 partnerships with
the NOC. But when it comes to sharing the oil
produced, 88% will go to Libya and only 12% to
Petro Canada.
In contrast to the general
world wide trend, recent governments in
Saskatchewan have emphasized maximizing the
return to the private corporations and
minimizing the return to the people of the
province. Between 1991 and 2007 the province
collected only 17% of the revenues from the
sale of our oil. This is a dramatic change in
policy since the 1970s and early 1980s when
our government collected over 50% of the
revenues. The second basic policy is that
Saskatchewan should export our oil and natural
gas to the United States as fast as possible.
In contrast to Alberta, there is no public
debate or discussion in this province. We can
thank the NDP for that.

John W.
Warnock is author of Selling the Family
Silver published by the Parkland Institute
and CCPA-SK in November 2006.

The
Northernmost Banana Republic
by John W. Warnock
January 6, 2008

http://www.actupinsask.org
In the 1960s Saturday Night was a very
popular Canadian weekly magazine. Much of
its success was due to its editorl, Ralph
Allen. Unlike Maclean's Magazine of
today, it was not a voice of the political
establishment.
Allen looked at the
high degree of foreign ownership and control
of the economy, our heavy dependence on
trade with one country, and our emphasis on
exporting raw materials and natural
resources and declared that Canada was “The
Northernmost Banana Republic.” He looked at
U.S. political domination of Canada, based
in our subordinate position in NATO, NORAD,
the Defence Production Sharing Agreement and
other military alliances and declared that
Canada had no sovereign independence. He
described Canada as “Puerto Rico North.”
On a more intellectual level, Harold Innis,
distinguished professor of political economy
at the University of Toronto, argued that
Canada went from being a colony of Great
Britain to being a satellite of the United
States without ever having been an
independent country. And all of this was
before the continental free trade
agreements.

Saskatchewan
as a resource colony
If Canada is a Banana Republic, then what is
Saskatchewan? Our leaders brag that we are
no longer an agricultural province,
dependent on exporting basic food products.
Our strength, it is argued, is in the
extraction and export of our natural
resources.
Yet all of our resource industries are
dominated and controlled by large trans
national corporations, most of them foreign
owned. Even the nominally Canadian
corporations, like the largest oil
companies, the Potash Corporation of
Saskatchewan, and Cameco, sell their stock
on the New York Stock Exchange and are
majority-owned by U.S. investors.

Excess
profits in the oil industry
So what difference does that make? Let’s
look at the oil industry as one example. As
everyone knows, the general international
price for oil has gone from $20 a barrel in
2002 to $100 a barrel in 2007. We know that
because we all pay that at the gas pump.
But these price increases far exceed the
increases in the cost of the extraction of
oil, and the result is that the oil
companies have record profits and so much
cash on hand they don’t know what to do with
it all. Economists call this “economic
rent,” the monopoly or excess profits that
are made from the extraction of a natural
resource when the returns are higher than
the general rate of return on invested
capital.
Around the world oil producing countries are
increasing the royalties and taxes on the
private oil companies to try to get a larger
share of these monopoly profits. In almost
all producing countries, the governments
have taken the position that natural
resources are a free gift from nature and
therefore the benefits from their extraction
should go to all the citizens, not just
private investors. Almost every oil
producing country has at least one
state-owned National Oil Company (NOC),
designed to capture as much of the economic
rent as possible for the government. But not
in Canada!

What is a
fair return to the owners?
What about Saskatchewan? We have had a
consistent policy since 1982, covering the
Tory government Grant Devine, the NDP
governments of Roy Romanow and Lorne
Calvert, and now the Sask Party government
of Brad Wall. Policy should minimize the
return going to the province and maximize
the return going to the investors in the oil
corporations.
When private oil corporations seek the right
to extract and use a natural resource like
oil they must pay a fee to the general
public for the use of the resource. These
take the form of royalties and fees. In
Saskatchewan during the NDP government of
Allan Blakeney royalties and fees rose to
56% of the value of the sales of petroleum.
Since then they have steadily declined in
value. During the period of the recent oil
boom, royalties and fees collected by the
NDP government averaged only 15% of the
value of petroleum sales. This royalty rate
has been the lowest in Canada.

Alberta
swings to the left?
In Alberta the legislature mandated that
royalties from the extraction of oil should
range between 20-25% of oil revenues. When
the Provincial Auditor reported that they
had fallen to only 19% in recent years,
there were public demands for an increase, a
special government-appointed panel to
investigate the industry, and a government
recommendation to raise the royalties by 20%
to bring them back up to the level of the
government mandate.
We all know the result of this. The oil
corporations vigorously protested. They
threatened to take their cash and invest it
somewhere else. But the question was always
where would they invest? New areas to invest
overseas were more costly, and there would
be higher royalties and taxes to pay.

Conservative
governments want more
In December Newfoundland announced that it
had signed a new deal with Husky Energy and
Petro-Canada to further develop the White
Rose offshore oil fields. There is a basic
royalty of 30%. In addition the companies
will pay a “super royalty” of 6.5% when the
price of oil is above $50. This brings the
total royalties up to 36.5%.
The libertarian Republican government in
Alaska recently announced that it was
raising the basic royalty on oil from 22.5%
to 25% and eliminating many of the key
deductions and subsidies. The oil
corporations grumbled.

Petro-Canada
moves to Libya
But the big news story is that Petro-Canada
has announced that it is shifting its
investment from Alberta to Libya. Petrocan
renegotiated and extended its existing
development contracts. For this it will pay
$1 billion as a “signature bonus” to the
Libyan National Oil company. All new
developments will be in a 50-50 partnership
with the Libyan NOC. While each of the two
companies will contribute 50% of development
costs, profits from these operations will be
shared 12% to Petrocan and 88% to the Libyan
NOC.
What is the message here? Libya is a world
power. Canada and Alberta are banana
republics. Then there is Saskatchewan, where
Petrocan has to cough up 15% in oil fees and
royalties. All our political leaders agree:
there is no reason to open any discussion of
resource royalties. Ralph Allen called this
our “colonial mentality.” Resource Royalties in
Alberta and Saskatchewan by John W. WarnockThe
Leader-PostOctober 30, 2007

On
October 25 Alberta Premier Ed Stelmach released his
government’s position on new royalties for the oil and
gas industry. Increases were announced, but they were
lower than those recommended by the government-appointed
panel of inquiry. The oil industry did not want any
increases. The general public wanted major increases. In
response to public demands, outgoing Premier Ralph Klein
had appointed an independent commission to look at oil
and gas revenues in the province. It held public
hearings. The panel’s report called for increases in
royalties in the range of 20%, which would have brought
the provincial government an estimated additional $2
billion in revenues. The
opposition Liberal Party said the 20% increase was the
absolute lowest increase that was acceptable. The NDP
urged higher royalty rates. The Alberta Federation of
Labour insisted on higher rates and argued that if the
Stelmach government did not carry through they would
make resource royalties a key issue in the upcoming
provincial election. The
Parkland Institute argued that natural resources are
owned by the people of Alberta. The province allows the
private corporations to extract and use the oil and gas
to make a profit. It argued that all the economic rent,
the excess or monopoly profits, should go to the people
as a whole. The private investors were only entitled to
a normal rate of profit. Over the past several years the
price of oil had risen from $20 a barrel to over $90 and
the corporations have been making huge monopoly
profits. This is reflected in their record profits and
bloated retained earnings. So
what about Saskatchewan? While prices of oil,
potash and uranium have been skyrocketing, the NDP
government has been cutting royalties and taxes. The
opposition Saskatchewan Party and Liberal Party are on
side. The Saskatchewan Federation of Labour has been
silent on this issue while arguing for additional
taxpayer subsidies for Weyerhaeuser Corporation. The NDP
government says it is not interested in opening a debate
on resource royalties. The mass media agrees. We have a
consensus in Saskatchewan among those whose opinion
counts.
Saskatchewan’s resource industries are all dominated by
large transnational corporations. Even the large
Canadian oil corporations trade their stock on the New
York market and are majority owned by American
investors. Saskatchewan’s political and business leaders
agree it is better for the economic rent from
exploitation of our resources to go to the United States
than to the provincial government treasury.

John
W. Warnock is author of Selling the Family Silver: Oil
and Gas Royalties, Corporate Profits, and the
Disregarded Public, published by the Parkland Institute
and CCPA Saskatchewan in 2006. Alberta Panel
Recommends Higher Royalties and Taxes on the Oil
Industry

On
September 18, 2007 the Alberta Royalty Review Panel
released its report on the oil and gas industry. It
urged higher royalties and taxes on the industry in
order to get a “fair share” for the people of Alberta.
The report has been widely attacked by people in the
industry. The new Alberta Premier, Ed Stalmach, has
stated that the Progressive Conservative government
would make a decision on the issue within three weeks. The
panel of industry experts heard testimony at hearings in
five cities. Business and petroleum industry
representatives strongly supported the present system.
The general public, environmental organizations, and
several academics recommended significantly raising
royalties and taxes.
Research by the panel confirmed that conventional oil
and gas reserves are declining steadily. The province is
becoming increasingly dependent on extraction from the
tar sands. The present royalty system has as a goal a
return of 20% to 25% of the value of the sales of the
resource. In recent years, because of the special low
royalties set for the tar sands, this has dropped to
19%. In Saskatchewan the royalties from the extraction
of oil have averaged between 14% and 16% in recent
years. For
the tar sands, the present system sets royalties at 1%
of gross revenues until the corporation recovers all of
its investment. Then it pays a royalty of 25%. The panel
proposes that the 1% rule be retained but that after
they recover their investment the royalty rate should
rise to 33%.

Introduce an excess
profits tax
Furthermore, they make a strong case for the
introduction of a “severance tax.” This would be a very
moderate “excess profits” tax which would be applied
when the price of West Texas Intermediate oil exceeds
$40 per barrel. This would be set at 1% and rise to a
maximum of 9% when the price reaches $120 per
barrel. As a comparison, following the dramatic increase
in the price of oil over the past three years, Russia
has imposed an excise tax where the government takes 90%
of the value of the oil when the WTI price exceeds $25
per barrel. In
Alberta, as in Saskatchewan, much of the conventional
oil and gas deposits are depleting. Where a well or zone
is mature and now is facing declining production, the
panel proposes that royalties be lowered. The higher
producing oil and gas wells and fields would pay higher
royalties.

Blackout in Saskatchewan
While this report earned front page status in the Globe
and Mail, and many articles in their business section,
the Regina Leader-Post has chosen to not run any
articles or comments. And of course our NDP government
has remained completely silent. No need to remind the
voters that the Conservative governments in Newfoundland
and Alberta are moving to raise royalties and taxes on
the oil industry while our supposedly left wing NDP
government has been lowering them. If
David Karwacki and the Liberals came out on the side of
the general public on this issue, and made it central to
their campaign, they might get elected. A lot of people
are looking for an excuse not to vote for the moribund
NDP, and a great many people do not like or trust the
Sask Party. Update: Finance Minister Pat
Atkinson has announced that the NDP government is
not interested in opening up a discussion of
resource royalties in Saskatchewan.

Saskatchewan
Resources and RoyaltiesWho benefits from low
royalties and taxes?

In
the area of business economics and political economy,
one of the major topics over the past few years has been
the dramatic rise in the price of most natural resource
commodities, the profits being made by the large
trans-national corporations and the efforts by resource
producing countries to capture the surplus or excess
profits created in these industries. Across North
America there has been widespread criticism of the oil
corporations for the high price of gasoline. But there
has been absolutely no debate on this issue in
Saskatchewan. The major political parties, the business
community and the mass media are not interested. Why is
this the case? It
is not that the issue is foreign to Canada. In
Newfoundland the major political issue over the past two
years has been the effort by Danny Williams’ Progressive
Conservative government to get a greater share of the
value of oil from offshore extraction. In Alberta the
Tory government created a special commission to look
into the royalties and taxes being paid by the large
corporations extracting bitumen from the tar sands. This
commission has held hearings across the province, with
the general public demanding higher royalties and taxes
and the oil and gas industry and the business community
in general supporting the status quo.

Saskatchewan’s history In
the past this issue has been central to political debate
in Saskatchewan. During the NDP government headed by
Allan Blakeney (1971-82) a major effort was made to
capture more revenues for the people of the province.
This invoked a major struggle with the potash and oil
industries. The
Tory government of Grant Devine (1982-91) began the
process of privatizing and deregulating the oil and gas
industries, the potash industry, the uranium industry
and the coal industry. This brought major
confrontations, protests, marches and most likely led to
the defeat of the Tory government. In
the election of 1991 the New Democratic Party promised
to raise royalties back up to the levels that they were
under the Blakeney government. But once elected they
reversed direction and completed the privatization and
deregulation policies begun by the Tories. They even
started to privatize Sask Power, one of the most sacred
Crown corporations, and completely divested the
government from any control over the natural gas
industry. Furthermore, as the resource industries became
more profitable, they introduced further cuts to
royalties and taxes.
Perhaps this is why there is no debate over this most
important issue. There is now a consensus among the
three major political parties in this province that
privatization, deregulation and the reduction of
corporate taxes is the right way to go.

Economic rent as monopoly
profits.
There are two basic theories of the role of resources
and their use by human beings. From the beginning there
was the democratic theory, that natural resources are a
free gift from nature (or the Creator) and are there for
the use of all on an equitable basis. No one should
profit from the exploitation of natural resources to the
detriment of others. Since early 1970 the Green approach
has been added, that resources should only be used in a
sustainable manner and that other species have just as
much right to exist on the planet as human beings.
Historically this democratic theory was identified with
the political “left”, which since 1791 meant those who
favoured the expansion of democracy, the expansion of
human rights, and the creation of a more egalitarian
society.

Changes under the new
world capitalist system The
liberal theory of the use of natural resources came with
the rise of capitalism. The first comprehensive case for
the liberal vision of resource use was set forth by John
Locke in the 17th century in defence of the British
seizure of Aboriginal lands in North America. This view,
supported by Adam Smith and other liberals, held that
men had the right to seize land and resources which were
not be used, were not being used to make a profit, or
were not being used to produce products for sale in the
world market. The capitalist view emphatically opposed
collective or communal ownership of land and natural
resources. Exploitation of natural resources should be
by individuals or corporations who claim ownership of
them. In this process, they argued, the private
exploiters of these resources did not owe any
compensation to the general public. One of the major
developments of the 19th century was the world wide
transformation of land and resources from common
property to private property, imposed by the imperial
and colonial regimes from Europe. Since the liberal
theory promotes unequal access to and unequal profit
from the exploitation of natural resources, it has
always been seen as the “right wing” theory of resource
use.

Contemporary rent theory
Today in the world capitalist economy David Ricardo’s
theory of economic rent from the exploitation of natural
resources is the guide used by mainstream and business
economists. Ricardo argued in 1818 that economic rent is
a excess or surplus profit that comes from the
exploitation of resources under a monopoly condition. If
there is a competitive market, Ricardo argued, there
will be no economic rent. Rent under this definition
only occurs where there is a return to the investor over
and above what is necessary to keep labour and capital
producing products. Thus
across industrial Canada the average annual real return
on equity (ROE) is 4.5%, which excludes inflation. The
oil industry insists that it needs a 12% ROE because of
extra “risks” involved, although these are virtually
non-existent in Canada. In 2005 the Globe and Mail
Report on Business found that among the ten largest oil
and gas corporations in Canada, the lowest ROE was 18%,
earned by those who invested in Talisman Energy
Corporation. The highest ROE was 38%, earned by those
who invested in Imperial Oil. Clearly, the oil
corporations in Canada are capturing excess profits,
referred to in political economy as economic rent.

Recent trends in
Saskatchewan’s resource industries Let
us take a quick look at trends in prices, revenues and
royalties for the extraction of Saskatchewan’s major
natural resources.

(1) The uranium industry.
For many years the price of a pound of uranium oxide
hovered around $10. No new nuclear power plants were
being built and few nuclear weapons. But everyone knew
this was going to change. Beginning in 1985 the
consumption of uranium exceeded production. The gap was
covered by the conversion of nuclear warheads in the
former Soviet Union into fuel for nuclear reactors. But
this ended when President Vladamir Putin announced that
the remaining warheads would be reserved for conversion
and use in Russia. China and India announced plans
to build nuclear reactors. The price began to skyrocket.
By 2005 the world’s spot price for a pound of uranium
rose to over $100. The NDP government reduced royalties
on the industry in 1998 and 2002. Who
has benefitted from the dramatic increase in economic
rent from the extraction of uranium in
Saskatchewan? Areva (formerly Cogema) owned by the
French government and their nuclear partners,
Mitsubishi, and Cameco Corporation, formerly a
Saskatchewan Crown corporation, based in Saskatchewan,
but with a majority of its stockholders living in the
United States.

(2) The potash industry.
The price for a tonne of potash was about $80 in 2003.
By June 2007 it has increased to $192 per tonne.
The price increase has followed the general rise in
fertilizer prices, as farmers are using more fertilizer
to try to keep food production up with increasing
demand. Furthermore, many countries are now subsidizing
the production of ethanol, and farmers are using more
potash to grow oil products. In 2003, just before the
provincial election, the NDP government cut royalties on
this industry. The beneficiaries have been the owners of
the Potash Corporation of Saskatchewan, formerly a Crown
corporation, based in the province, but with a majority
of its stock holders in the United States. The other
major beneficiary has been Mosaic Corporation, owned and
controlled in Minneapolis by Cargill Industries and IMC
Global.

(3) The coal
industry. Saskatchewan produces lignite
or thermal coal, a low grade coal burned for the
production of electricity. The coal, owned by the people
of Saskatchewan, is mined, sent down a railroad for a
couple of kilometres, and burned by Sask Power, a Crown
corporation owned by the people of the province. In the
years before privatization and deregulation Sask Power
mined the coal. Coal prices everywhere increased
significantly in recent years, and in Saskatchewan they
have gone from around $10 to $14 per tonne. The mining
of the coal is now done by Luscar Energy, a partnership
between Sherritt International Corporation and the
Ontario Teachers’ Pension Fund. This is a good example
showing the logic of the liberal theory of economic
rent.

(4) The natural gas
industry. Down until 1985 the natural gas
industry in Saskatchewan was under the control of Sask
Power. The Crown corporation had first claim on all
development; the goal was to secure an adequate supply
for the future needs of the province. Sask Power set the
price for natural gas. It entered the market, developed
gas fields, and owned and held them for the people as a
whole. This began to change in 1985 when the federal and
provincial Tory governments introduced the first
deregulation of the industry. In 1988 the Devine
government created Sask Energy, split off from Sask
Power. Then in November 1998 the NDP government
abolished Sask Energy’s monopoly of selling gas, allowed
private firms to enter the gas distribution system, and
required Sask Energy to allow private firms to use their
infrastructure. Sask Energy is now just another
corporation, required to buy natural gas on the open
market. They no longer create reserves for future needs.
But
natural gas is disappearing in Western Canada, as
conventional sources are playing out. Many more wells
have to be drilled to just maintain current production.
Natural Resources Canada projects that gas production
will peak around 2007 and then drop by 75% by 2020.
Isn’t this something that should concern us? In
the meantime, the price for natural gas has gone from
around $2.00 per thousand cubic feet in 1999 to a high
of $11 in 2006 and have for the time being dropped back
to around $5.50 in 2007. But a report by the
International Energy Agency released in July 2007
projects that by 2010 natural gas prices in Canada will
rise sharply because of a lack of supply. The
U.S. Energy Information Agency reports that profits and
economic rent have been high in the natural gas industry
in Western Canada due to relatively low exploration and
drilling costs. There is easy access to pipelines to the
United States, the market for 60% of Canada’s gas. To
help this struggling industry, the NDP government
reduced royalties and taxes on the industry in 2002 and
2004.

(5) The oil industry.
Everyone knows that the price of a barrel of oil has
gone up from $20 in 2002 to over $70 in 2007. In 2002
the Government of Saskatchewan reported that the oil
industry in Saskatchewan, which increasingly depends on
the extraction of lower-priced heavy oil, could do well
as long as the price of West Texas Intermediate light
oil was at least $20 per barrel. With the oil
corporations reporting steadily increasing profits, the
NDP government reduced royalties and taxes on the
industry in 2002 and 2005. In 2007 the price for
Hardesty Heavy crude oil was around $58 per barrel. It
is very difficult to judge just how profitable the oil
industry is because the transnational corporation all
use intra-corporate transfer pricing to shift costs to
low tax areas. All of the large corporation follow the
pattern of Enron and use off shore dummy corporations to
hide profits in tax free zones. Nevertheless, the oil
corporations in Canada report record profits to their
stock holders. Even based on the cost figures provided
by the industry’s propaganda organization, the Canadian
Association of Petroleum Producers, economic rent
(excess profits) are very high. On a most conservative
basis, I have calculated that they are taking a minimum
of $1 billion of economic rent from the province. Under
a democratic theory of economic rent, all of this should
go to the people of the province.

Conclusion
Around the world, all oil producing countries are using
various tools to capture these monopoly profits. Almost
all producing countries have state-owned corporations,
like the formerly existing Sask Oil, which control the
industry. These national oil companies (NOCs) may
completely own and control the industry, which is
typical of the OPEC countries. They may engage in joint
ventures with private firms. All the major oil producing
countries have production sharing agreements where a
fixed percentage of oil must be delivered to the state.
Many countries are now implementing excise taxes to
capture the economic rent which has ballooned in recent
years. For example, Russia has imposed an excise tax of
90% for all revenue over $25 per barrel. We have used
all of these techniques in Saskatchewan in the past, but
we use none of them today. In June 2007 Wood Mackenzie
issued a special report on the oil industry in Canada.
They found that Canada was the only oil producing
country in the world that was actually reducing
royalties and taxes. Even Great Britain and Alaska were
raising their take. We
must remember that we all pay for this out of our own
pockets when we buy petroleum products. We also pay for
it in the reduced provincial revenues, leading to cuts
in social programs. We pay for this give away of our
resources through the higher property taxes we pay, as
the provincial government, short of revenues, cuts
grants to municipalities and school boards.
Perhaps the people at this meeting can come up with some
ideas for how we can put this central economic and
political issue back on the table for discussion.

Opening
remarks
delivered at a public meeting on natural resource and
government revenues sponsored by the Regina Area Group
of the Green Party of Saskatchewan, September 6, 2007.

John W. Warnock
recently retired from teaching political economy and
sociology at the University of Saskatchewan and the
University of Regina. He is author of Saskatchewan: The roots of
discontent and protest (2004). A research
associate with the Canadian Centre for Policy
Alternatives - Saskatchewan, he is author of (1)
Natural Resources and
Government Revenue: Recent Trends in Saskatchewan
Canadian Centre for Policy
Alternatives - SK (2005); and (2) Selling the Family
Silver: Oil and Gas Royalties, Corporate Profits, and
the
Disregarded Public. Parkland
Institute, University of Alberta and CCPA - SK (2006).

Hike Royalties
and Start Debate on Them

by John W.
WarnockLeader-Post
June 27, 2007

All
the political posturing on equalization by the Calvert
government is designed to divert the attention of the
public from their policy on the extraction of our
natural resources, and in particular oil and natural
gas. The
NDP government has consistently pursued two policies
since 1991. First, the province will do everything in
its power to promote and enhance the export of our oil
and gas to the United States, as fast as possible. There
is no regard for the finite nature of these
non-renewable resources nor our future needs. The
United States, with five percent of the world’s
population, consumes 25 percent of the world’s energy.
Saskatchewan extracts around 152 million barrels
of oil per year, and over 70 percent of that is exported
to the United States. The U.S. armed forces alone
consume 124 million barrels of oil per year, more than
the annual consumption of Sweden. The
second policy is to try to maximize the profits of the
oil and gas corporations operating in Saskatchewan. All
kinds of direct subsidies are offered to the industry.
But the key factor has been the steady reduction of
royalties and taxes imposed on the industry. During the
NDP government of Allan Blakeney (1971-82), the
government took a number of steps to increase the
returns to the province from the private exploitation of
our natural resources. In the period from 1979-82,
provincial revenues from the exploitation of oil
averaged 56 percent of the value of sales, which was
roughly the general level found in most other oil
producing areas around the world.
Grant Devine’s government (1982-91) reversed this policy
and began to reduce the royalties and taxes on the
industry. The Tory policy was continued by the NDP
governments of Roy Romanow and Lorne Calvert. While oil
prices were rising, the Calvert government continued to
reduce royalties. In this period of obscene profits by
the oil and gas corporations, the province now only
collects around 16 percent of the value of the
extraction of oil. All
the bluster over equalization, and the demand to exempt
the oil and gas industry from the formula used to
determine a province’s “fiscal capacity”, is an attempt
to head off any debate over natural resource policy. How
many people know that the royalties and taxes collected
from this industry in Saskatchewan are the lowest in the
world? That even the Alberta Tory government receives
between 20 and 25 percent of oil sales? The OPEC
countries in the Middle East and Mexico collect close to
100 percent of the value of the extraction of oil. Libya
collects around 80 percent. Norway collects around 78
percent. Venezuela collects around 65 percent. Russia
collects 90 percent of the value of oil sales above $25
per barrel. Kazakhstan collects 80 percent. Even Alaska, with its right wing
Republican governments, collects around 25 percent. It
seems that we are about to elect a Saskatchewan Party
government. If so, it will just be more of the same.

John W. Warnock is a
Regina political economist and author of Selling the Family Silver:
Oil and Gas Royalties, Corporate Profits, and the
Disregarded Public, published by the Parkland Institute and the
Canadian Centre for Policy Alternatives (November 2006).

Premier
Lorne Calvert, backed by Jack Layton, leader of the
federal NDP, insists that Stephen Harper has broken an
election promise to Saskatchewan to exclude revenues
from natural resources as part of the formula designed
to determine which provinces should receive equalization
payments from the federal government as a “have not”
province. Ralph Goodale, the former Liberal Minister of
Finance, also insists that the Harper government has
broken a solemn promise to the province. This does
appear to be the case. But this political tactic serves
the purpose of dodging the more important question: What
is the purpose of equalization payments, and how should
they be determined? Of
course we all know that politicians regularly break
election promises. In 1984 Brian Mulroney campaigned
that he would end political patronage in Ottawa. In 1993
Jean Chretien promised to renegotiate NAFTA and to
repeal the GST. Some will remember that in the 1991
provincial election Roy Romanow and the NDP promised to
end poverty and close all food banks in their first term
of office, which would have cost the province around
$350 million. They also pledged to stop cutting
royalties on the extraction of natural resources and
begin raising them back to the levels they were under
the government of Allan Blakeney. Had they reversed the
cuts to resource royalties they would have had more than
enough revenues to eliminate poverty. A second question
that should be asked is who would benefit from the
exclusion of natural resources from the equalization
formula?

What is equalization?
During the Great Depression of the 1930s a number of
provinces, including Saskatchewan, faced financial
bankruptcy and had to be bailed out by the federal
government. Under the BNA Act, provinces were given the
responsibility for the key areas of education, health
and social services, but they were not given the taxing
authority to carry out this mandate. Furthermore, many
of the less industrialized provinces, including
Saskatchewan, did not have the economic base to provide
services equal to those available in the more prosperous
areas of the country. In
1937 Mackenzie King’s Liberal government created the
Royal Commission on Dominion-Provincial Relations,
better known as the Rowell-Sirois Commission after its
two chairmen. Unlike other Royal Commissions, this one
held hearings all across Canada, even in small towns. A
wide variety of people gave evidence at these hearings,
not just “stakeholders.” Furthermore, the commissioners
actually listened to what the people told them. Their
report recommended that the federal government
adopt a system of “National Adjustment Grants” provided
to a provincial government whenever it “could not supply
Canadian average standards of service and balance its
budget without taxation (provincial and municipal)
appreciably exceeding the national average in relation
to income.” This was necessary in order to guarantee “a
national minimum standard of social services” across
Canada. John Diefenbaker’s government gave strong
support to this policy in 1957, and it was included in
the Constitution Act of 1982. The
people of Canada told the Rowell-Sirois Commission that
family, friends and community were very important.
People should not be penalized because they live in
rural and remote communities or hinterland provinces.
Canadians demanded at least equality of opportunity if
not social justice. The goals of the equalization
program were to reduce regional disparities, create
national standards for basic public services, assist the
mobility of people across provincial borders, create a
sense of Canadian identity, and even share the wealth
across provincial borders. It was also established that
basic public services should be considered a citizenship
right. This set Canadian confederation off from that of
the United States. These principles have always been
opposed by those who insist that we should allow the
economic free market to determine what is best for all
of us.

Creating a formula for
equalization grants
Implementing these principles has been difficult.
However, from the beginning it was agreed that in
creating a formula for federal equalization grants the
criteria should be the “fiscal capacity” of all
provincial governments to raise revenues through
taxation. To be fair, all potential sources of revenues
must be included. Under the existing formula,
thirty-three sources of revenues are covered, including
most resource revenues.
There are some exceptions. Water is excluded because it
is almost always given to industry as a free subsidy, as
in the development of the Alberta tar sands. This was a
policy demanded by big business and granted by our
governments. Rents for water use and hydro power are not
adequately assessed, as they usually take the form of a
general subsidy to consumers through low rates and
special low rates for industrial enterprises. This
exclusion from the equalization formula creates a
disparity as it greatly benefits Manitoba, Quebec and
British Columbia, which have extensive water and
hydroelectric resources. This is an obvious fault in the
program.

Natural resources and
equalization
Almost every country in the world regards natural
resources as a national resource. This is logical and
fair because the geographic placement of natural
resources is an outcome of nature and not human
endeavor. The failure to take that position in Canada
has led to significant political and economic problems.
To exclude non-renewable natural resources from
equalization would completely undermine the basic
principles of equalization. All provinces have some
capacity for raising revenues from the taxation of
natural resources, and do so. In Saskatchewan, all
revenues from the extraction of natural resources go
into general government revenues. They are treated just
like any other revenue. The
application of any equalization formula is a difficult
political task. For example, when Lorne Calvert’s NDP
government reduces taxes on corporations and people with
high incomes, should this loss of government revenue be
offset by equalization grants from Ottawa?

The position of the
Calvert government
During the NDP government of Allan Blakeney resource
royalties and taxes were increased. Saskatchewan became
a “have province” and for a few years did not receive
equalization payments. The last three provincial
governments have all steadily reduced the royalties and
taxes on the use of natural resources. This policy has
been warmly received by the owners of the corporations
who extract our resources, for their income and profits
have greatly increased. Of course, this policy has
reduced provincial revenues. But is it fair that this
pro-business policy be offset by equalization grants
from the federal treasury? On a
number of occasions officials in the NDP government,
including then Finance Minister Janice MacKinnon, have
told me that they had no intention of raising royalties
and taxes on natural resources back up to the levels
they were during the Blakeney government. They could
instead get roughly equivalent revenues from the federal
government under the equalization program.
However, the federal government is not that stupid. In
1994 they introduced an amendment to the equalization
program called the “Generic Solution.” This was
specifically designed to deal with the Saskatchewan
policy, the “distortion” of the program which occurs
when a province reduces its tax rates knowing that
equalization grants would provide compensation. In
January 2003 the NDP government feigned surprise when
there was a reduction in the equalization grant from
Ottawa. Instead of continuing to assess Saskatchewan’s
mining tax base on the value of mineral production, it
shifted to the use of “net profits.” Saskatchewan’s
mines produced 13 percent of total Canadian mineral
sales but 55 percent of mining company profits. This was
a result of the steady reduction of provincial royalties
and taxes on the mining industry.
There is no money tree in Ottawa. Equalization payments
come from the taxes we all pay to the federal
government, most notably income taxes and the GST. The
policy of the NDP government has been to cut the
royalties and taxes on corporations extracting our
resources and instead collect revenues from federal
equalization payments. Now that the boom in resource
prices has produced enough additional revenue to make
Saskatchewan a “have province” under the equalization
formula, the Calvert government is insisting that
natural resources be eliminated from the formula so that
the province can collect another $800 million from the
federal treasury. This policy of taking from the poor
and giving to the rich does not serve us well. John W. Warnock is a
Regina political economist and author of Saskatchewan:
The Roots of Discontent and Protest
(2004).

This
is an election year for Saskatchewan. To no one’s
surprise, Lorne Calvert’s NDP government brought in a
budget that increases spending by about 1.5%.
However, the estimated revenues will not cover the
additional expenditures, so the government has chosen to
withdraw around $700 million from the Fiscal
Stabilization Fund, which is little more than a line of
credit. This has brought howls of protest from the usual
sources and charges that the budget is "unsustainable."
Total government spending in Canada has been declining
in recent years. As a percentage of the gross domestic
product, it has fallen from 52.3% in 1992 to 39.5% in
2006. In Saskatchewan government expenditures have
fallen from 22.7% of provincial GDP in 1994 to 20.6% in
2004. Over
the past 20 years federal and provincial governments
have been steadily cutting taxes, particularly taxes on
corporations and those in the higher income brackets.When major sources of
taxation are cut then either programs have to be cut or
revenues have to be raised from other sources. In
Saskatchewan we have seen both program cuts and a shift
to consumption taxes, fees for services and property
taxes.
While some business organizations and the Canadian
Taxpayers Federation are complaining about government
expenditures and demanding even more tax cuts, other
sectors of our society have different complaints.
Property taxes are among the highest in Canada. Schools
are being closed. Municipalities and school boards are
complaining that provincial grants have been cut
drastically since the days of Allan Blakeney's NDP
government (1971-82). There are long waiting lists to
enroll in most of the programs offered by SIAST. The
tuition at our two universities, once the lowest in
Canada, is now near the top. There are waiting lists for
many medical services and serious shortages of nurses.
Social assistance rates are now well below the basic
needs level. The province is desperately short of decent
affordable and social housing. Seniors cannot afford to
buy new glasses, get their teeth fixed, acquire hearing
aids and are hit hard when they have to take an
ambulance to go to this hospital. Everyone is
complaining about the sad state of our roads. And the
list goes on.

Revenues from resource
extraction In
all the discussion of the budget by our politicians and
media commentators, no one has brought up the major
issue of revenues from resource extraction. Without
capturing a fair return from the extraction of our
resources, most of which are non-renewable, we cannot
pay for the government services we desire. In the past
when we had good services, we also had higher royalties,
fees and taxes on the extraction of our resources. The
cuts in resources royalties and taxes have been welcomed
by the transnational corporations that extract these
resources, but they have left the province with a high
debt and diminished services. We can get an overview of
the loss of resource revenues by looking briefly at each
sector.(1) Forestry. The
royalties (stumpage fees) paid to the province for
massive clear cutting our forests are probably the
lowest in the world. The cost of wood to the forestry
firms is the lowest in Canada. Under the 1999 Forest
Resources Management Act, royalties on softwood large
enough to be used to make lumber is set at $2 per cubic
metre of wood. Corporations cutting similar wood in
Montana pay around $30 per cubic metre. The stumpage fee
for smaller wood used to make fibre boards and pulp is
only between $.75 and $1.00 per cubic metre. The
stumpage fees collected do not begin to cover the costs
that the Ministry of the Environment undertakes to serve
the industry and protect the forests. The province takes
in more revenues from hunting and fishing licenses than
it does from stumpage fees. (2) Potash. Between
1975 and 1981 royalties received from the extraction of
potash were 24% of sales. In addition, we also
benefitted from earning the profits from the Potash
Corporation of Saskatchewan, a Crown corporation now
privatized. In the period between 2000 and 2006
royalties were only 10% of sales. Potash sales began a
steady increase in 2001, reflecting the growing world
demand for fertilizer for the production of food. Over
the past two years prices have risen by over $80 per
tonne. The private potash corporations report that since
2003 their gross margins have almost tripled. Yet in
2003 and 2005 Lorne Calvert’s NDP government reduced the
royalties on the potash industry and provided a range of
other subsidies. (3) Uranium. While
uranium has been a very important export mineral, since
the beginning the province has received precious little
from its extraction. Royalties were always set at a very
low rate. The return to the province increased during
the Blakeney government through joint ventures between
the Saskatchewan Mining and Development Corporation, a
Crown corporation, and the major private corporations.
However, this return ended when SMDC was transformed
into Cameco Corporation and privatized by the Tory
government of Grant Devine (1982-91) and the NDP
government headed by Roy Romanow (1991-2002).
Uranium prices were low after 1978 due to the freeze on
the building of new nuclear power plants, rarely
exceeding $15 per pound. Nevertheless, annual
consumption of uranium has exceeded production for over
the last 25 years. The gap was filled by the
reprocessing of Soviet nuclear weapons. But this source
diminished and has now ended. India and China began to
build nuclear power plants, and the price for uranium
began to rise. To everyone’s surprise, right at this
moment the NDP government decided to further reduce the
royalties paid to the province. The price of a pound of
uranium rose to $20 in 2004, $26 in 2005, and $45 in
2006. By March 2007 the price had risen to $95 per
pound. Profits for the uranium corporations rose
dramatically. The 35 biggest uranium corporations
reported an average return on investment of 90 percent
over 2006-7! But very little of this market value has
gone to the people of Saskatchewan. (4) Natural gas.
The volume of natural gas extracted and exported to the
United States and Eastern Canada has risen dramatically
from 1987 to the present. The market value of
Saskatchewan production rose from $166 million in 1987
to $2.1 billion in 2005. However, North America has
entered the era of “peak oil,” and natural gas
production peaked in the Western Canada Sedimentary
Basin in 2004. The average production from a natural gas
well fell from 65 BOE in 1995 to 30 BOE in 2004. Natural
Resources Canada estimates that Saskatchewan production
will fall from 261 billion cubic feet in
2005 to only 70
billion cubic feet in 2020. We are fast running out of
natural
gas.
Royalties from natural gas
extraction in Saskatchewan have been very low by world
standards; since 2001 they have averaged around 13% of
sales. Most producing countries around the world get a
return of at least 50%. Bolivia, for example, gets
between 50% and 82%, depending on the natural gas field.
The economic rent (surplus profit) from natural gas and
oil production is mainly captured by producing countries
through the use of state owned corporations, production
sharing agreements, and a variety of excess profits
taxes. We no longer use any of those fiscal tools in
Saskatchewan. (5) Petroleum. The
production and export of oil has greatly increased in
recent years. In 1991 78.1 million barrels were
extracted in Saskatchewan, and this rose to 153.7
million barrels in 2003. The value of sales over this
period has risen from $1.2 billion to $4.8 billion.
In the past, the government of Saskatchewan used
royalties to try to capture some of the economic rent
from the extraction of petroleum. During the last two
terms of the NDP government of Allan Blakeney (1976-82),
petroleum royalties received by the province represented
51% of sales. In the period from 2000-06, the royalties
we received fell to only 16% of sales. As the
international price for oil rose from $40 to $70 per
barrel, so did economic rent. In spite of the windfall
profits going to the oil corporations, in 2002 and 2005
the NDP government of Lorne Calvert reduced royalties
and taxes on the industry. All the governments in the
world’s other oil producing countries were raising
royalties, fees and taxes to increase their share of the
windfall profits. Many governments were also expanding
the role of their state owned oil corporations. But no
governments in Canada were moving to defend the public
interest. It was as if the oil industry were actually
running the government. Conclusion
There is a “gentlemen’s agreement” among the major
political parties, the large transnational organizations
which control the resource sector, and the mass media
that there should be no public discussion of natural
resources, their extraction, and resource royalties and
economic rent. Business as usual is to continue. Only
the small Green Party wants a major public discussion,
and they have very little influence in the province.
However, the general concern over loss of public
services and increases in regressive taxes cannot be
resolved without confronting the current unacceptable
situation in our resource industries. Even in Alberta,
where the political right and the oil companies have
totally dominated for many years, there is a formal
public inquiry now under way into the level of royalties
and taxes paid by the oil industry.

John W. Warnock is a
Regina political economist, author, and research
associate with the Canadian Centre for Policy
Alternatives - Saskachewan.

Economic
rent
is identified with the extraction and use of natural
resources. The most widely cited liberal definition
of economic rent was set forth by David Ricardo
(1772-1823). This is the concept which is presently
used by economists, resource industries and
governments. Economic rent is the surplus that is
created by the use of a natural resource over and
above what is necessary to keep labour and capital
on the land and producing products. These costs
include a normal profit. Under a condition of
perfect competition, there is no economic rent.
Economic rent is created only when the exploitation
of a natural resource like oil or gas produces a
return that is over and above the normal rate of
return in a competitive market. It is a monopoly
profit or an excess profit.

The oil and gas
industry
Within the oil and gas industry today, economic rent
is generally defined as the difference between the
cost of exploration, field development, extraction,
royalties and fees and the market price. These costs
include a normal rate of return on investment. While
the normal return on equity in Canada is around
4.5%, the oil and gas industry insists that a 12%
return is needed to attract capital investment
because of various “risks.” In this industry there
has always been a very large economic rent and an
ongoing political struggle over what share of that
surplus profit should go to the private corporations
and what share should go to the government.
Therefore, in a democratic society, governments
should be seeking to maximize their share of the
economic rent, or excess profits, over the life of
any resource development project. All governments
also want to have a steady and predictable revenue
so that they can plan for government expenditures. A
democratic government would be expected to place a
high priority on developing policies which guarantee
that the economic rent is re-invested in the local
area or province. If this does not happen, resource
development results in boom and bust communities. A
socially responsible democratic government also aims
to have a large share of the benefits from resource
development accruing to local indigenous
populations.
Royalties and bonus fees are a cost of production –
a payment to society as a whole for the use of
resources which belong to all the people. In order
to stimulate production, governments have on
occasion introduced very low royalties. The social
democratic government in Venezuela in the late 1990s
lowered the royalty rate to only one percent. The
government of Alberta has set the royalty rate in
the tar stands at only one percent until the
corporations have recovered all of their capital
investments. (Mommer, 2002)
In the 1970s Allan Blakeney’s NDP government in
Saskatchewan raised royalties significantly in order
to capture a greater share of resource revenues from
the extraction of oil and gas. Between 1976 and 1982
royalties averaged 52% of oil sales. This has been
reduced to only 16% under the present NDP government
headed by Lorne Calvert. The current figure is not
out of line with royalties charged around the world.
It is widely understood that royalties are not the
appropriate government tool to capture economic
rent. (Warnock, 2005)

Capturing economic
rent: an example from Saskatchewan
In Saskatchewan reserves of light crude and medium
crude are in steady decline, as is the case across
the Western Canada Sedimentary Basin (WCSB). The
decline in these higher priced and more valuable
sources is being replaced by heavy crude, which is
more costly to extract and process. Technological
innovations, including horizontal drilling, have
actually reduced the costs of drilling wells on the
Canadian prairies. The industry also benefits from
federal and provincial subsidies and supports, very
low royalties and tax rates, a good drilling
environment, local refineries, and a pipeline system
to the most important world market. (Canadian Energy
Research Institute, 2005)
What market price is necessary to produce a viable
oil industry on the Canadian prairies? In 2004 the
Canadian Energy Research Institute (CERI) reported
that for new tar sands projects a “West Texas
Intermediate price of US$25 per barrel would enable
an oil sands project developer to cover all costs
and earn a 10% return on investment.” In 2003 the
National Energy Board concluded that “a price of
US$22 per barrel provides adequate returns to
support investment in the oil sands and offshore oil
development.” (Dunbar, 2004; National Energy Board,
July 2003)
The cost of extracting heavy oil in Saskatchewan is
below that incurred in the off shore and tar sands
industries. In 2003 Li Ka-shing, the Hong Kong owner
of Husky Oil, stated that the Lloydminister Heavy
Oil Upgrader was profitable when the price of West
Texas Intermediate (WTI) light crude was $18
per barrel. In 2002 Saskatchewan Energy and Mines
reported that “reasonable levels of conventional
activity can be maintained at the WTI price in
excess of US$20 per barrel.”(Saskatchewan Energy and
Mines, Oil in Saskatchewan, 2002)
In 2005 the average price of light and medium crude
extracted in Saskatchewan was $68 per barrel. But
heavy oil has a discount price from light crude oil,
in recent years around 30%. The price of Hardisty
Crude Oil at Bow River (heavy oil) has gone from $25
a barrel in 2001 to $38 in 2004 and $46 in 2005. So
how much economic rent is captured from the
extraction of heavy oil in Saskatchewan?
It is very difficult to determine the profitability
of the oil and gas industry. Their data is not made
public. They also have a range of methods of
transfer pricing plus all the major corporations use
off shore tax havens. The public is forced to depend
on the data provided by the Canadian Association of
Petroleum Producers (CAPP) or the U.S. Energy
Information Administration. The cost figures
provided by CAPP are significantly above those
provided by the corporations to the U.S. Department
of Energy.
One recent study was done by ARC Financial
Corporation using CAPP data. It reports that the
average annual operating cost of conventional wells
in the WCSB in 2006 was around $7 per barrel. To
this is added $2 per barrel for General and
Administrative expenses. In addition royalties and
bonus fees averaged $8 per barrel. There are
provincial and federal taxes on profits and income,
but these apply to all corporations and cannot be
seen as a method of collecting economic rent. While
CAPP data indicates that the cost of capital for the
industry had fallen to around 5% in 2005, in that
year the industry reported an average return on
equity of 22%. (Tertzakian and Baynton, 2006)
The Globe and Mail Report on Business Magazine
records that for 2003 the Big 10 Canadian oil
companies reported a return on equity which ranged
between a low of 18% for Talisman Energy to a high
of 34% by Imperial Oil. The very high return on
equity reflects the fact that almost all of the
economic rent produced in recent years in Canada has
gone to the private sector. ARC Financial
Corporation finds that the tremendous growth of
equity capital in the industry has resulted in “an
elevated level of ‘unemployed’ capital in the
Canadian upstream oil and gas industry.” (Report on
Business Magazine, July/August 2004; Tertzakian and
Baynton, 2006)
Looking at the case of heavy oil in Saskatchewan,
the report by ARC Financial Corporation suggests
that extraction costs were around $9 per barrel,
royalties and bonus fees were $8 per barrel, and
return on equity would be well above the cost of
capital. This confirms the statements by Husky Oil
and the Saskatchewan Department of Industry and
Resources. Of the $46 average price for heavy oil in
2006, at least $26 per barrel would be economic
rent, and all of this went to the private sector.
Other oil producing countries use a range of tools
to collect economic rent. These include state owned
oil corporations (NOCs), joint ventures between NOCs
and independent oil companies, production sharing
agreements with private oil firms, and various forms
of excess profits taxes. OPEC countries in the
Middle East use special term contracts which specify
that when the international oil prices rise, so does
the share of revenue that goes to the state. None of
these fiscal tools are used in Canada.

John W. Warnock has
recently retired from teaching political economy and
sociology at the University of Regina and is author
of Selling the Family Silver; Oil and Gas Royalties,
Corporate Profits, and the Disregarded Public,
published by the Parkland Institute at the
University of Alberta and the Canadian Centre for
Policy Alternatives, Saskatchewan Division.

Collecting
Rents from Resource Extraction: The Advantages
of State Ownership

by John W.
WarnockParkland PostFall 2006

Natural resources are a free gift
from nature. All governments wish to obtain at least
some revenues from the extraction and use of renewable
and non-renewable resources. Today, these resources
are commonly owned by the state, and governments have
responsibility for controlling their extraction and
use.
Thus in a democratic society governments should be
seeking to maximize their share of the econonic rent
(defined by economists as “excess profits”) over the
life of any resource development project. Economic
rent should be re-invested in the local economy. A
substantial share should go to the local indigenous
communities. A large share should be saved for the
use of future generations.
Economic rent is most easily captured when resource
development is through state-owned enterprises. The
success of these national enterprises (known in the
oil industry as National Oil Companies or NOCs)
depends on the degree of democracy that exists in
the province or country. In an advanced
industrialized democracy, like Norway, a NOC like
Statoil is a very successful and efficient company.
Petrobras in Brazil has a similar reputation. In
Saskatchewan our state-owned public utilities have
been very efficient and innovative and provide
excellent services. We know that the Crown
corporations that were created in the past in the
resource sector, including the Potash Corporation of
Saskatchewan, the Saskatchewan Mining and
Development Corporation and SaskOil, were all very
well run and provided much greater returns to the
general population than they have since they were
privatized. In sectors of the economy which are
dominated by large foreign-owned corporations with
monopoly power, local, democratically controlled,
state enterprises offer a very good alternative.
Between 60 and 100 countries have had state-owned
oil and gas companies at one time or another, and
they have a wide variety of histories. For example,
in Mexico it was normal for PEMEX, the NOC which has
completely dominated the oil and gas industry, to be
used as a patronage instrument by the Institutional
Revolutionary Party (PRI). Furthermore, it was
government policy to require PEMEX to pay 65 percent
of their annual revenues to the federal government.
Revenues from PEMEX provided 35 to 40 percent of the
federal government’s revenues and greatly
contributed to providing foreign exchange. But these
two policies left PEMEX with inadequate retained
earnings to develop new oil and gas resources.
In Argentina, the Peronista governments required
YPF, its local oil and gas NOC, to pay 68 percent of
its annual revenues to the government, which left it
with inadequate funds for expansion. Furthermore,
both Mexico and Argentina dictated that their NOCs
should heavily subsidize the retail price of oil
products, which cut into their revenues. Why did
this happen? In both these cases the general policy
was determined by the rich and powerful who
controlled the government. Revenues from the NOCs
allowed government to avoid imposing taxes on
private corporations, wealth or individuals with
high incomes.
It is also much easier to collect rent when resource
development is through joint ventures with private
corporations. In these cases, because of direct
financial and management participation in the
operation, the costs and revenues are known to the
government. Many governments in oil producing
countries have utilized production sharing
agreements; it is common practice that the
government takes a share of the oil or gas that is
produced. But because the government does not have a
direct equity position in the private firms, they do
not really know the details of how the companies are
operating. Thus in Venezuela the new government of
Hugo Chavez sent auditors to examine the books of
the private corporations who had production sharing
agreements, and they reported wide spread tax
avoidance.
The advantages of having a NOC and government
control of the industry was demonstrated during 2005
when there was a rapid increase in the price for oil
and gas and windfall profits which bore no
relationship to the cost of production. In the OPEC
countries the governments and NOCs had term
contracts with the foreign-owned private oil
corporations (known in the industry as IOCs). Under
these term contracts they were able to raise their
prices for contract holders to match the increase in
world prices. Thus in OPEC as a whole prices
increased from their 2004 levels by 40.9 percent for
the first nine months of 2005, and the income to
OPEC countries increased 46.4 percent over the same
period. In contrast, in Canada and the United States
almost all of these windfall profits went to the
private corporations.
It is much more difficult for governments to recover
a large part of the economic rent when the natural
resource is being developed by private corporations.
It is most difficult to gain a major share of the
rent when development is by large foreign-owned
transnational corporations who operate on a world
wide basis and are vertically integrated. The
secrecy of operations, transfer pricing, and the
increasing use of offshore tax havens have posed a
very serious problem for governments around the
world. These practices were well demonstrated in the
cases of Enron and Yukos.
Governments have an additional role to play in
resource development. Resource extraction can be
very destructive to the local environment, often
involving the production of toxic wastes.
Furthermore, those working in the industry can be
exposed to harmful and life-shortening products. We
know this only too well in Saskatchewan where
uranium mining in the North has been devastating to
the environment and the health of workers.
Governments need to establish and enforce strong
regulations to protect the environment, communities
and workers.

John W. Warnock
recently retired from teaching political economy at
the University of Regina. His study Selling
the Family Silver: The Oil and Gas Industry in
Saskatchewan will be
jointly published by the Saskatchewan branch of the
Canadian Centre for Policy Alternatives and the
Parkland Institute in November 2006. Richard
Heinberg: “How Will You Heat Your Homes in
Saskatchewan?”

Last night 350 people braved the cold in Regina
and went to hear Richard Heinberg, one of North
America’s top experts on the oil and gas
industry. He presented data showing the
disappearance of oil and natural gas on a world
wide basis and in particular in North America.
He pointed out that the best geological research
in Canada predicts a fairly rapid decline in
natural gas production in the Western Canada
Sedimentary Basin. He asked: “What are people in
Saskatchewan going to do as the supply of
natural gas declines and prices start to
dramatically increase?”
He is dead right on this. In October Natural
Resources Canada released its new study:
Canada’s Energy Outlook: The Reference Case
2006. While predicting the demand for
natural gas to steadily increase by around 1.2%
per year, they expect that conventional natural
gas production will peak in 2006 and then start
to decline. The extraction of coal bed methane
gas will increase, but it cannot begin to
replace the loss of conventional natural gas.
Shipments of natural gas to Eastern Canada will
have to decline, hopefully replaced by imports
of liquified natural gas (LNG). The
Mackenzie Valley Pipeline will be built and this
gas will be available for customers on the
prairies. But Natural Resources Canada ignores
the fact that all of this gas is expected to be
used to expand the extraction of tar sands oil,
to be exported to the United States.
So what are Canadians going to do? Natural
Resources Canada projects that net exports of
natural gas to the United States will decline
from 3,700 billion cubic feet in 2005 to 1,300
billion cubic feet by 2020. As Heinberg reminded
us last night, there is the unpleasant fact of
the proportionality sharing clause in the North
American Free Trade Agreement (NAFTA). This
states that Canada cannot reduce its exports to
the United States below the average of the most
recent three years. We are dreamers, he
suggested, if we believe that the U.S.
government will be willing give this up.

The production
treadmill
If you ask anyone in the NDP government, or the
opposition parties, they will say that the oil
and gas industries are booming in Saskatchewan.
We have never had it better. We have good
reserves of heavy oil. Bids for exploration and
development are rising. Many more natural gas
wells are being drilled. But what does this
really mean?
Between 1995 and 2003 natural gas production in
Saskatchewan reached a production plateau,
averaging about 285 billion cubic feet per year.
But over that period the number of new gas wells
drilled rose from 268 in 1995 to 2314 in 2003.
This follows the pattern of peak oil and gas
seen in the United States and elsewhere. As we
run out of natural gas, many more wells have to
be drilled just to maintain existing production.
New wells produce for a much shorter period, now
with 50% of total production occurring in the
first year. In Saskatchewan regulations used to
specify that only one well could be drilled on
every section of land. Now in the Hatton
district in the Southwest corner of the
province, the norm is between four and eight
wells per section, and in special cases
permission is given to drill twelve.
This is not an oil and gas boom, it is a sign of
a collapsing industry. The rapid increase in the
drilling of such marginal wells is only made
possible by the existence of monopoly or excess
profits, which have occurred over the past three
years. Oil and gas corporations are awash in
retained earnings and have relatively few places
to invest to rebuild their reserves. Of course
we are all paying for this through the tripling
of oil and gas prices over the past three years.
Heinberg stressed that we need to press hard on
this issue. Around 80% of us have natural gas
heating. Natural Resources Canada projects that
between 2005 and 2020 the production of natural
gas in Saskatchewan will decline by 75%. This
fact seems to have escaped all of our local
politicians as well as those people in charge of
Sask Energy and Sask Power.

What are the
alternatives?
There are good alternatives, which Heinberg
outlined. We know them from the studies done by
the Saskatchewan Energy Development and
Conservation Authority, before it was abolished
by the NDP government in 1995. It starts with
serious conservation programs, the promotion of
energy efficiency, and the introduction of
demand management programs. We have excellent
wind and solar potential. Biomass in the North
can provide heat and electricity. Burning coal
for electricity can be reduced through the
progressive introduction of switchgrass and fast
growing trees, which are planted on marginal
land and do not take away from the production of
food. Geothermal heating can be greatly
expanded. Electricity can be used to support
transportation by public transit and trains.
Automobiles can be built that are much more
efficient. But all of these options take time to
develop. When the crunch comes, as it certainly
will, we can have rationing, as we had in World
War II. But given the current political climate,
most likely we will get rationing according to
ability to pay.
Peak oil and gas is occurring right as we are
beginning to experience the cost of fossil fuel
development: greenhouse gas emissions and
climate change. Heinberg stressed that we will
have to reduce our general consumption levels
and start to produce food for local consumption.
The looming crisis requires a decentralization
of energy production to local communities, not
new centralized “clean coal” megaprojects. North
American integration, pushed hard by President
Ronald Reagan and Prime Minister Brian Mulroney,
is the wrong approach in a period of uncertain
climate. What would happen in Saskatchewan if we
had an ice storm in the winter and much of the
province had no electricity for days?
As we found out in the last municipal election,
there is little concern over these very
important developing issues. Business as usual
prevails in all the corridors of power. We
continue to build larger houses for smaller
families. Urban sprawl, dependent on
automobiles, marches on. The giant box stores
and chains, so admired by our local politicians,
promise us that everything we need can be
supplied from China or Vietnam. As Heinberg
argued, it is time to start thinking about the
future we are giving our children and
grandchildren.

John W. Warnock
is the author of Selling the Family Silver: Oil
and Gas Royalties, Corporate Profits, and the
Disregarded Public, available on line at the
Canadian Centre for Policy Alternatives.

Extract: Oil
is a natural resource in a category all its own. Ever
since the invention of the internal combustion engine,
oil has been - quite literally - the fuel that fires
economic growth. Transportation, agriculture,
manufacturing, large cities - none could exist in their
current form without oil. Indeed, the entire global
economy as it is currently constituted would simply
grind to a halt withlout it. The
global struggle to control the resource began as soon as
the British Empire switched it fleets from coal to oil,
signaling a profound shift in the imperial powers'
strategic priorities. The United States had plenty of
domestic oil reserves, but Great Britain, France and the
other European powers needed secure supplies from the
major oil fields in North Africa, the Middle East, Asia
and Latin America. In the struggle among the imperial
powers, and between the advanced capitalist states and
the colonized Third World (where most of the world's
reserves were and still are located), First World
governments and the largest oil companies worked closely
together to gain and maintain control of strategic
reserves so as to ensure a ready supply of cheap and
secure oil. Recent wars in Afghanistan and Iraq - which
are widely condeded to have been wars over control of
oil - are merely the last moves in this grand game. With
global reserves nearing peak production, and world-wide
demand continuing to grow at an alarming rate, the
stakes of this game have risen significantly in recent
years, and Canada's role in America's energy wars has
become increasingly evident. Canadian policy has
stressed ownership and control of the oil and gas
industry by large corporations that have enjoyed very
high profits. Rather than developing this strategic
industry in a sustainable way to benefit present and
future generations of Canadians, federal and provincial
governments have chosen to support the policy goals of
the U.S. government by steadily increasing our exports
to the United States. As a result, Canadians now face
the grim prospect of higher and higher fossil fuel
costs, with virtually no infrastructure of sustainable
energy alternatives.

*
*
*
*
*
*
*
*
*
*
*
*
*
*
* *

The current situation So
how do things stand today? Canada produces around 3.2
million barrels of oil per day. We export around 1.65
million barrels per day to the United States. Since
Canadians consume 2.3 million barrels per day, the
balance has to be imported. According to the U.S. Energy
Information Agency, Canada has the lowest royalties and
taxes on oil of any producing area in the world. Thus,
when there are huge windfall profits from high oil price
rises unrelated to costs of production, as has occurred
in the past year, the oil corporations take almost all
of the increase.
Meanwhile, conventional oil is drying up on the Canadian
prairies. Production peaked in 1971 and has steadily
declined since then. In 1994 producing wells delivered
on average around 30 barrels per day; this fell to 18
barrels by 2003. New fields are smaller. Fewer wells are
being drilled. As they say in the industry, "the fruit
on the bottom of the tree has been picked." Our cheaper
oil has been exported and we will now have to depend on
more expensive, harder-to-extract oil - which,
incidentally, we are also bound by NAFTA to export.

*
*
*
*
*
*
*
*
*
*
*
*
*
*
* *

Canadian oil and gas policy has served, and continues to
serve, the interests of the oil companies and the U.S.
government. It has propped up the U.S. economy by
keeping U.S. oil and gas prices artifically low.. It has
brought enormous returns to the owners and shareholders
of the private corporations. As a capital intensive
industry, it has brought well-paying jobs to some areas
of Canada as well as significant revenues to the
government of Alberta and, to a lesser extent, other
provinces. But as prices for oil and gas continue to
rise, and supplies dwindle, Canadians will come to
realize that oil and gas integration has left them out
in the cold; short-term gains for some have come at the
expense of long term pain for the great majority.

John W. Warnock, a
Regina political economist, is preparing a report on the
oil and gas industry in Saskatchewan for the Canadian
Centre for Policy Alternatives.

Danny Williams, Conservative Premier of Newfoundland,
recently declared that "we're not going to give away our
resources any more." His government negotiated a revenue
sharing agreement with Ottawa. Then they raised the
royalty rate for oil extraction. In addition, all new
offshore developments would have to include an equity
position for the provincial government.
Newfoundland wanted the Hebron heavy oil off shore
project to proceed, but Exxon Mobil, Chevron,
Petro-Canada and Norsk Hydro decided to postpone
development. Williams proposed the introduction of
"fallow-field" legislation to allow the government to
take over oil leases which were not being developed.
Such legislation exists around the world, including
Alberta. However, Newfoundland could not proceed without
the approval of the federal government, the joint owners
of these offshore resources. Stephen Harper, always
loyal to the oil industry, said no. The
opposition to the Newfoundland oil policy was led by
Exxon Mobil, the largest private oil company in the
world, which owns and controls Imperial Oil in Canada.
They threatened a major suit against Newfoundland under
Chapter 11 of the North American Free Trade Agreement
(NAFTA). The oil giants argue that such legislation
would be "regulatory confiscation." As
Premier Williams pointed out, the price of a barrel of
oil has risen from $25 in 2003 to over $70 in 2006,
resulting in enormous wind fall profits for the oil
corporations. In North America, precious little of this
has gone to governments in the form of increased
royalties and taxes. The people of Newfoundland were
demanding a bigger share. In
2005 Exxon Mobil reported sales of $371 billion, profits
of $36 billion and a return of 31 percent on invested
capital. They spent only $18 billion on new investments
and used $23 billion to buy back their own stock. Still,
at the end of the year they had $163 billion in cash
held as retained earnings. All the other major oil
corporations reported similar statistics. The
corporate media in Canada lined up with the oil
corporations and attacked Danny Williams. The Globe and
Mail likened him to Hugo Chavez, the President of
Venezuela, accusing him of "bombast and bullying."
Chavez, who has won nine elections in the eight years he
has been in office, has undertaken to regain control
over the country's oil resources, given away under
previous administrations. Venezuela took major state
equity positions in 31 production sharing agreements,
raised royalties and taxes, directed auditors to examine
the books of the foreign oil corporations and presented
them with bills for past tax avoidance. Venezuela has
expanded the role of their state-owned oil company,
PVSA. Nevertheless, almost all of the foreign-owned oil
companies have accepted these changes for they can still
make good profits. With the disappearance of new sources
of oil around the world, they do not want to be excluded
from the huge Orinoco River basin, an oil sands deposit
larger than exists in Alberta and easier and cheaper to
extract. The
days are gone when the giant private oil corporations
dictated oil policy. They are now in stiff competition
with the National Oil Companies from OPEC countries and
those in China, India, Brazil, Malaysia, Russia and even
Norway. A few of the small oil producing countries have
National Oil Companies but do little direct field work
themselves. There are thousands of independent oil
service companies who do the work for them. Newfoundland
could easily find other corporations to develop their
oil and gas industry.
Canada is caught in a difficult situation. The
geopolitics of oil are clear. The major oil reserves are
all in less developed countries, almost all of whom have
National Oil Companies. They control around 80% of the
known oil reserves. The advanced capitalist countries
are the consuming countries, and they have consistently
opposed state-owned corporations and high royalties and
taxes. So where does Canada stand in this world
division?
While Canada is a major oil supplier, its governments
have chosen to follow the policies of the consumer
countries. As the U.S. Energy Information Agency
reports, the royalties and taxes on oil in Canada are
the lowest in the world. The U.S. considers Canada's oil
as their oil, and our governments agree. Norway takes a
different position, with Statoil as an equity partner in
all North Sea developments, higher royalties and taxes,
profits from Statoil's world operations, and a Petroleum
Fund which invests oil revenues in renewable energy
resources.
Since 1982 Saskatchewan governments have been lowering
royalties and taxes on oil and gas extraction. Saskoil,
our Crown corporation, was privatized. The Heritage Fund
has been abolished. Our dwindling oil and gas resources
are being exported to the United States as fast as
possible. Premier Lorne Calvert and Industry and Natural
Resources Minister Eric Cline have run off to Washington
to convince the Bush Administration that we are loyal
supporters and will not ship our oil and gas resources
to China or India, or even conserve them for our own
use! Is there no alternative?

John W. Warnock is a
Regina political economist and author.

New Study on Resource Royalties in Saskatchewan

Regina. June 16, 2005

CCPA Saskatchewan is pleased
to be releasing a new report today about
natural resource revenues and recent government trends
in Saskatchewan by John W. Warnock. A copy of
the full report, as well as a shorter
Saskatchewan Note's piece, can be found on the
national website which is linked below for your
convenience.

A new study
released today by the Canadian Centre for Policy
Alternatives says it is time there was a serious
public debate in Saskatchewan
about resource royalties.

The report
shows that resource royalties in Saskatchewan are
among the lowest in the world. The report also
documents trends around the world which show that
governments in most other jurisdictions are increasing
royalty rates and control over resource industries.

“Around the
world it is not uncommon for private corporations to
pay up to 50% of natural resource sales to the host
country,” says John W. Warnock, the report’s author
and Research Associate for CCPA Saskatchewan.

“In Saskatchewan
the amount of royalties as a percentage of sales has
decreased on average since the 1980s to less than
15%,” says Warnock. “At the same time the
international price for the majority of natural
resources has increased dramatically and resource
extraction corporations are recording record sales and
profits.”

Warnock
says it is not surprising that royalty reductions have
been welcomed by Saskatchewan’s
large
corporations,
but
he
says
the
revenue losses have created serious problems.

“Devine’s
Government responded with budget deficits and
increases to the provincial debt, while Romanow and
Calvert’s NDP Government’s balanced the budgets by
cutting programs, introducing gambling, increasing
user fees, and off loading costs,” says the
author.

“Property
taxes have risen to the highest level in Canada
because municipality and school board grants have been
cut. If the royalties had remained at their
previously high levels, the government would have had
an additional $2 billion to spend in 2003.

Warnock
says that in the 1991 provincial election, the NDP
pledged to raise royalties on natural resource
extraction back to the Blakeney Government’s levels.
But once in office, he says, they rejected their
pledge and continued the Devine Government’s policy
and steadily reduced the extraction royalties on
non-renewable natural resources.

“Saskatchewan’s
government
is moving in the opposite direction and the public
must demand that serious public debate take place on
resource policy,” concludes Warnock. “It is
especially ironic that the Government of Saskatchewan
is undertaking a Business Tax Review and the
businesses already getting the biggest breaks in this
province – the resource extraction corporations - are
exempt from this process.”

Oil and
Gas Prices Rise -- But Who Benefits?

By John
W. WarnockRegina Leader-Post, November 1, 2005
:
Murray Mandryk, political columnist for the Leader-Post, was right to criticize
the NDP government for its hypocrisy over the issue of
the rapid increase in natural gas prices. Both the Tory
and NDP governments have significantly contributed to
this problem. But his column (October 14) also reflects
the general ignorance in this province of the oil and
gas industry. As
Sask Energy made clear in their presentation to the
Saskatchewan Rate Review Panel on October 11, they have
lost all control over the price of natural gas because
of the decision by governments to introduce a policy of
deregulation and privatization. This began with the
Halloween Agreement of 1985 undertaken by Tory
governments but was brought to fruition in Saskatchewan
by the subsequent NDP governments. The policy was
enhanced by the Canada-U.S. Free Trade Agreement, the
building of additional natural gas pipelines to the
United States, a massive increase in gas exports to the
United States, and the recent peak in natural gas
production in the Western Canada Sedimentary Basin. As a
result, gas prices in Saskatchewan are now set in the
United States. And they are steadily rising. This
policy has aided U.S. consumers by keeping prices lower
than they otherwise would have been. As the U.S.
Department of Energy shows, natural gas royalties and
taxes in Canada are among the lowest in the world, and
the "netback" (or gross profit) to corporations here
have been very lucrative, around 50% in 2004 when gas
was at $6.20 per thousand cubic feet (it is now over
$10). The policy of deregulation has been very good for
oil and gas corporations and those who own them but
hardly good for the great majority in Saskatchewan. In
contrast, in Europe the major gas utilities, both
private and state owned, seek long term supply contracts
and are directly engaged in the development of pipelines
bringing gas from North Africa and Russia. They also are
taking equity positions in projects for natural gas
development. Their policies are guided by long term
planning for security of supply, stability of price to
consumers, and equitable distribution. Under government
directed guidelines, their goal is to serve the needs of
consumers first rather than maximizing profits for
investors. This used to the policy in Saskatchewan
before deregulation and privatization. The
oil and gas industry in Saskatchewan, and their
advocates like Mandryk, Bruce Johnstone of the Leader-Post, former Tory premier Grant
Devine and Lorne Calvert's NDP government, insist that
expanded drilling here is due to the reduction in
royalties and taxes by the Tory and NDP governments.
This is nonsense. First, Canada has a tremendous
advantage over many areas due to very low risk factors,
a highly educated and trained work force, the very best
technology and expertise, and closeness to the main
market, the United States. This favourable climate
should allow our royalties and taxes to be higher
than other
jurisdictions. But according to the U.S. Department of
Energy, Canada's royalties and taxes on the oil industry
are among the lowest in the world. In their annual
survey of the 28 largest oil and gas corporations, they
report that in 2002-3 the direct lifting costs
(production costs) in Canada averaged $5.34 per barrel
while royalties and taxes averaged an additional $0.23
per barrel. The
major oil corporations have demonstrated that they are
willing to pay much higher royalties and taxes than in
Canada. Here are a few examples. The
government of Venezuela has recently raised royalty
rates to over 50% and have transformed 32 existing
operating service agreements with private corporations
to production sharing agreements where the national oil
company (PVDSA) will get at least a 50% equity position.
Yet the private corporations have accepted these
changes.
Russia has recently raised its royalties and excise
taxes on oil. The government will now take 100% of the
value of all sales over $27 per barrel. Yet the private
corporations are still seeking investments, particularly
in the Arctic area.
Libya, with the international boycott lifted, is again
opening up its oil regions for development. In recent
bids the large foreign corporations agreed to give the
government between 70% and 94% of the value of oil and
gas sales.
Kazakhstan, hardly a world power, has recently opened
bids to investment in Caspian Sea offshore blocks. They
have demanded, and obtained, contracts with the private
corporations which grant their national oil company a
50% equity position and which will pay 80% of the value
of all sales to the government. When the oil majors
objected to the tough terms, the government told them if
they didn't like it they had a lineup of investors who
were willing to take their places. The
fact is for many years now the provincial governments in
Canada, including Saskatchewan, have been giving our oil
and gas away for virtually nothing.
Mandryk states that "unless you're a dyed-in-the-wool
socialist who still believes that a potash-industry-like
nationalization of resources is a sound economic
strategy, it's tough to quibble with Devine's point."
This may sound good to the oil majors, but it is utter
nonsense. There are now around 60 countries which have
state-owned national oil corporations (known as NOCs).
They control about 77 percent of the world's 1.1
trillion barrels of proven oil reserves. None of these
countries have socialist governments. They recognize
that oil is a finite and strategic natural resource, and
they are determined to retain a high percentage of the
economic rent from its depletion for their own citizens.
Overall, they are doing a very good job at this. Some
NOCs completely dominate the industry, as in Mexico,
others stress joint venture development with private
firms, and others just manage their national assets and
set royalties and taxes. Of course the big NOCs like
those from China, India and Russia are involved in
projects all around the world. But relatively small NOCs
like Norway's Statoil, Malaysia's Petronas, and Brazil's
Petrobras are each involved in dozens of oil and gas
developments in all parts of the world. In a
public opinion poll in late August of this year Leger
Marketing found that 49% of Canadian respondents wanted
to see petroleum resources nationalized and 43% wanted
to see the oil corporations nationalized. Canadians are
on the right track. Unfortunately, there are no
political parties here willing to take up the cause.

John W. Warnock, a
Regina political economist, is currently researching the
oil and gas industry in Saskatchewan.

Sustainable
Forestry is Possible
by John W. Warnock

Briarpatch
Magazine,
Vol. 32, No. 1,
February 2003, pp. 27-29.Review article of Thomas
Davis, Sustaining the Forest, the People
and the Spirit. Albany:
State University of New York, 2000.

Extract: Saskatchewan can
learn from the Menominee First NationFrom the beginning of commercial
exploitation by European immigrants to the present, the
foresty in Saskatchewan has been viewed as a natural
resource to be used for private exploitation. From small
independent loggers to the monopoly domination by American
giant Weyerhaeuser Corporation, there has never been any
policy dedicated to sustainability. That is the North
American capitalist tradition of resource extraction. But
the Menominee First Nation in Wisconsin has demonstrated
that this does not have to be the case and that the
ecological alternatives is better in every way.
In New York in 1995 the United
Nations presented a special award to the Menominee of
Wisconsin for their contribution to the world's
environment through sustainable forestry development. The
Menominee forest, 235,000 acres in Wisconsin close to
Green Bay, is the only true forest left in the Great Lakes
area, abd for that matter, in the Eastern United States.
People from all over the world come to see how it is
possible to maintain a forest, with all its original
diversity, and still carry out logging. Between 1865 and
the early 1990s, over two billion board feet of saw timber
had been harvested with no reduction in the existing saw
timber stock. Biodiversity had been meaintained. The
Menominee Forest stands in direct contrast to the Nicolet
National Forest on its northern border, which has been
managed in the "business as usual" way. Many studies have
compared the two forests.

*
*
*
*
*
*
*
*
*
*
* *

Today in Saskatchewan over 90
percent of all forests are clear cut. Around 600,000
hectares of forest area is classified as "not
satisfactorily restocked." This amounts to 66 percent of
the forest harvested, by far the highest in Canada. At
best, Saskatchewan's policy has been to replace forests
with plantations of single species, at a single age, and
to spend large amounts of public money to fight disease
and insect infestations.
Not much has changed over the
years. In 1999 the NDP government of Roy Romanow announced
a new plan for forestry which would double the annual
allowable cut in the Commercial Forest Zone in central
Saskatchewan. If forest firms actually carried out the
allowed cut, it would clear all the commercial timber from
this zone in just 27 years. Forest regeneration takes
between 70 and 90 years in the boreal forest.

John W. Warnock is a
Regina political economist, author, and activist with
the New Green Alliance.

Extract: Understanding
Saskatchewan's Forestry Policy
The Canada-U.S. Softwood Lumber
Agreement has expired, and the U.S. forest industry,
represented by the Coalition for Fair Lumber Imports,
has asked the U.S. Department of Commerce to impose
countervailing duties against the Canadian industry.
They argue that if Canadian governments wish to
subsidize their forest industry, that is their choice.
But under international trade rules set forth in the
Canada-U.S. Free Trade Agreement, the North American
Free Trade Agreement and the World Trade Organization,
such subsidies cannot be used to promote exports. The
U.S. forest companies are supported by a long list of
Members of Congress, trade unions and environmental
groups.
The U.S. industry has accused
Canadian provincial governments of providing subsidies
to the forest industry through very low royalties on
timber, non-enforcement of forestry rules, mandating
forest firms to comply with minimum cut requirements,
providing tax benefits to private firms, bailing out
firms in financial difficulty, and providing extensive
infrastructure, clean up and reforestation. Direct
subsidies have been given to forest corporations to
encourage local employment. They argue that our forestry
policy encourages over-harvesting and wasted wood
resulting in environmental damage. By granting very
large corporations long term cutting rights on huge
areas of land, the provincial governments have hurt
small, independent forestry companies and have denied
Aboriginal Canadians, who actually live in the forests,
access to forest resources.
The response by our political
leaders, government spokesmen, trade union leaders, and
the mass media is to emphatically dismiss the charges
out of hand. In Saskatchewan there is almost no public
debate on this issue.

*
*
*
*
*
*
*
*
*
*
*
*

The complete text of this article can be downloaded from
Policy Options: